What Moves the Stock and Bond Markets? A Variance Decomposition for Long‐Term Asset Returns

What Moves the Stock and Bond Markets? A Variance Decomposition for Long‐Term Asset Returns ABSTRACT This paper uses a vector autoregressive model to decompose excess stock and 10‐year bond returns into changes in expectations of future stock dividends, inflation, short‐term real interest rates, and excess stock and bond returns. In monthly postwar U.S. data, stock and bond returns are driven largely by news about future excess stock returns and inflation, respectively. Real interest rates have little impact on returns, although they do affect the short‐term nominal interest rate and the slope of the term structure. These findings help to explain the low correlation between excess stock and bond p. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

What Moves the Stock and Bond Markets? A Variance Decomposition for Long‐Term Asset Returns

The Journal of Finance, Volume 48 (1) – Mar 1, 1993

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Publisher
Wiley
Copyright
1993 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1993.tb04700.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper uses a vector autoregressive model to decompose excess stock and 10‐year bond returns into changes in expectations of future stock dividends, inflation, short‐term real interest rates, and excess stock and bond returns. In monthly postwar U.S. data, stock and bond returns are driven largely by news about future excess stock returns and inflation, respectively. Real interest rates have little impact on returns, although they do affect the short‐term nominal interest rate and the slope of the term structure. These findings help to explain the low correlation between excess stock and bond p.

Journal

The Journal of FinanceWiley

Published: Mar 1, 1993

References

  • Stock prices, earnings, and expected dividends
    Campbell, Campbell; Robert, Robert
  • Financial investment opportunities and the macroeconomy
    Chen, Chen
  • The term structure as a predictor of real economic activity
    Estrella, Estrella; Gikas, Gikas
  • Stock returns, expected returns, and real activity
    Fama, Fama
  • Large sample properties of Generalized Method of Moments estimators
    Hansen, Hansen
  • The tax adjusted yield curve
    McCulloch, McCulloch
  • R 2
    Roll, Roll

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