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Stock and Bond Returns with Moody Investors

61 Pages Posted: 17 Mar 2005  

Geert Bekaert

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Eric Engstrom

U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets

Steven R. Grenadier

Stanford Graduate School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: July 2, 2004

Abstract

We present a tractable, linear model for the simultaneous pricing of stock and bond returns that incorporates stochastic risk aversion. In this model, analytic solutions for endogenous stock and bond prices and returns are readily calculated. After estimating the parameters of the model by GMM, we investigate a series of classic puzzles of the empirical asset pricing literature. In particular, our model is shown to jointly accommodate the mean and volatility of equity and long term bond risk premia as well as salient features of the nominal short rate, the dividend yield, and the term spread. Also, the model matches the evidence for predictability of excess stock and bond returns. However, the stock-bond return correlation implied by the model is somewhat higher than in the data.

Keywords: Empirical asset pricing, equity risk premium, habit persistence, stock-bond correlation, macroeconomic factors

JEL Classification: G12, G15, E44

Suggested Citation

Bekaert, Geert and Engstrom, Eric and Grenadier, Steven R., Stock and Bond Returns with Moody Investors (July 2, 2004). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=685971 or http://dx.doi.org/10.2139/ssrn.685971

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eric C. Engstrom

U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3044 (Phone)

Steven R. Grenadier

Stanford Graduate School of Business ( email )

Graduate School of Business
Stanford, CA 94305-5015
United States
650-725-0706 (Phone)
650-725-6152 (Fax)

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