Common Shocks in Stocks and Bonds

90 Pages Posted: 27 Jun 2019 Last revised: 16 Nov 2020

See all articles by Anna Cieslak

Anna Cieslak

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Hao Pang

Duke University, Fuqua School of Business, Students

Date Written: June 22, 2019

Abstract

We propose an approach to identifying economic shocks (monetary, growth, and risk-premium news) from stock returns and Treasury yield changes, which allows us to study the drivers of asset prices at a daily frequency since the early 1980s. We apply the identification to examine investors’ responses to news from the Fed and key macro announcements. We uncover two risk-premium shocks—time-varying compensation for discount-rate and cash-flow news—which have distinct effects on stocks and bonds. Since the mid-1990s, the Fed-induced reductions in both risk premium sources have generated high average stock returns but an ambiguous response in bonds on FOMC days.

Suggested Citation

Cieslak, Anna and Pang, Hao, Common Shocks in Stocks and Bonds (June 22, 2019). Available at SSRN: https://ssrn.com/abstract=3409340 or http://dx.doi.org/10.2139/ssrn.3409340

Anna Cieslak (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919 660 7879 (Phone)

HOME PAGE: https://sites.google.com/site/ancieslak/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Hao Pang

Duke University, Fuqua School of Business, Students ( email )

Durham, NC
United States

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