Stock and Bond Returns with Moody Investors

61 Pages Posted: 17 Mar 2005

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Eric Engstrom

Board of Governors of the Federal Reserve System

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 C. 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

Eric C. Engstrom

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
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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