Year: 2009
Type: report
Abstract: We study the economic sources of stock-bond return comovements and its time variation using a dynamic factor model.We identify the economic factors employing a semi-structural regime-switching model for state variables such as interest rates, inflation, the output gap, and cash flow growth.We also view risk aversion, uncertainty about inflation and output, and liquidity proxies as additional potential factors.We find that macro-economic fundamentals contribute little to explaining stock and bond return correlations, but that other factors, especially liquidity proxies, play a more important role.The macro factors are still important in fitting bond return volatility; whereas the "variance premium" is critical in explaining stock return volatility.However, the factor model primarily fails in fitting covariances.
DOI: 10.3386/w15260
Authors: Lieven Baele, Geert Bekaert, Koen Inghelbrecht
Institutions: HOGENT University of Applied Sciences and Arts, National Bureau of Economic Research, Universitat de València, University of the Basque Country, Tilburg University, Ghent University, Network for Studies on Pensions, Aging and Retirement, Bank of England, Columbia University, National Bank of Belgium
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
Funder: Inquire Europe
OpenAlex ID: W2161963544