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The determinants of stock and bond return comovements

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Author Info

  • Lieven Baele

    ()
    (Finance Department, CentER, and Netspar, Tilburg University)

  • Geert Bekaert

    ()
    (Graduate School of Business, Columbia University)

  • Koen Inghelbrecht

    ()
    (Department Financial Economics, Ghent University, and Finance Department, University College Ghent)

Abstract

We study the economic sources of stock-bond return comovement and its time variation using a dynamic factor model. We identify the economic factors employing structural and non-structural vector autoregressive models for economic state variables such as interest rates, (expected) inflation, output growth and dividend payouts. We also view risk aversion, and uncertainty about inflation and output as additional potential factors. Even the best-fitting economic factor model fits the dynamics of stock-bond return correlations poorly. Alternative factors, such as liquidity proxies, help explain the residual correlations not explained by the economic models.

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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 119.

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Length: 67 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:nbb:reswpp:200711-27

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Keywords: factor models; stock-bond return correlation; macroeconomic factors; new-Keynesian models; structural VAR; liquidity; flight-to-safety;

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