Common Shocks in Stocks and Bonds
75 Pages Posted: 8 May 2020
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Common Shocks in Stocks and Bonds
Date Written: May 2020
Abstract
We propose a new approach to identify economic shocks (monetary, growth, and risk-premium news) from stock returns and Treasury yields. The method allows us to study the drivers of asset prices at a daily frequency over the last three-and-a-half decades. We analyze the content of news from the Fed, major macro announcements, and sources of time-varying stock-bond comovement. The results emphasize the importance of two risk-premium shocks-compensation for discount-rate and cash-flow news-which have different effects on stocks and bonds. The impact of the Fed on both risk premiums explains why stocks but not bonds earn high FOMC-day returns.
Keywords: Federal Reserve, risk premia, stock-bond comovement
JEL Classification: E43, E44, G12, G14
Suggested Citation: Suggested Citation
Anna Cieslak (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919 660 7879 (Phone)
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