Common Shocks in Stocks and Bonds
75 Pages Posted: 8 May 2020
Date Written: May 2020
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
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