The Real Explanation of Nominal Bond-Stock Puzzles

60 Pages Posted: 22 Jul 2021

See all articles by Mikhail Chernov

Mikhail Chernov

UCLA Anderson

Lars A. Lochstoer

University of California, Los Angeles (UCLA) - Anderson School of Management

Dongho Song

Johns Hopkins University - Carey Business School

Multiple version iconThere are 3 versions of this paper

Date Written: July 20, 2021

Abstract

We present evidence that the mix of transitory and permanent shocks to consumption is changing over time. We study implications of this finding for asset prices. The uncovered dynamics of consumption implies modestly upward sloping real bond and equity curves, upward sloping nominal yield curve, and sign-switching correlation between equities and bonds consistent with the stylized facts. This is achieved without relying on the nominal channel too much. That is, as in the data, the variation of inflation in the model is under 40\% as a fraction of variation in nominal yields.

Keywords: Consumption dynamics, Stocks, Bonds, Term Structure

JEL Classification: E13, E21, E32, G12

Suggested Citation

Chernov, Mikhail and Lochstoer, Lars A. and Song, Dongho, The Real Explanation of Nominal Bond-Stock Puzzles (July 20, 2021). Available at SSRN: https://ssrn.com/abstract=3890345 or http://dx.doi.org/10.2139/ssrn.3890345

Mikhail Chernov

UCLA Anderson ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Lars A. Lochstoer (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Dongho Song

Johns Hopkins University - Carey Business School ( email )

Baltimore, MD 20036-1984
United States

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