61 Pages Posted: 17 Mar 2005
Date Written: July 2, 2004
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: 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