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- Publisher
- Oxford University Press
- Copyright
- © The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.
- Subject
- Original Article
- ISSN
- 0893-9454
- eISSN
- 1465-7368
- DOI
- 10.1093/rfs/hhq014
- Publisher site
- See Article on Publisher Site
Abstract
We study the economic sources of stock-bond return comovements and their 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 macroeconomic 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.
Journal
The Review of Financial Studies – Oxford University Press
Published: Jun 28, 2010
Keywords: JEL Classification G11 G12 G14 E43 E44