Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Cross-Section and Time-Series of Stock and Bond Returns

Contents:

Author Info

  • Ralph S.J. Koijen
  • Hanno Lustig
  • Stijn Van Nieuwerburgh

Abstract

Value stocks have higher exposure to innovations in the nominal bond risk premium, which measures the markets' perception of cyclical variation in future output growth, than growth stocks. The ICAPM then predicts a value risk premium provided that good news about future output lowers the marginal utility of investors' wealth today. In support of the business cycle as a priced state variable, we show that low value minus growth returns, typically realized at the start of recessions when nominal bond risk premia are low and declining, are associated with lower future dividend growth rates on value minus growth and with lower future output growth in the short term. Because of this new nexus between stock and bond returns, a parsimonious three-factor model can jointly price the book-to-market stock and maturity-sorted bond portfolios and reproduce the time-series variation in expected bond returns. Structural dynamic asset pricing models need to impute a central role to the business cycle as a priced state variable to be quantitatively consistent with the observed value, equity, and nominal bond risk premia.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w15688.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15688.

as in new window
Length:
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:nbr:nberwo:15688

Note: AP EFG ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  2. John H. Cochrane, 2008. "The Dog That Did Not Bark: A Defense of Return Predictability," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(4), pages 1533-1575, July.
  3. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, Elsevier, vol. 96(2), pages 175-194, May.
  4. Martin Lettau & Stijn Van Nieuwerburgh, 2008. "Reconciling the Return Predictability Evidence," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(4), pages 1607-1652, July.
  5. Lars Peter Hansen & Jose Scheinkman, 2006. "Long Term Risk: An Operator Approach," NBER Working Papers 12650, National Bureau of Economic Research, Inc.
  6. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 6(4), pages 379-406.
  7. David Backus & Mikhail Chernov & Ian Martin, 2009. "Disasters implied by equity index options," NBER Working Papers 15240, National Bureau of Economic Research, Inc.
  8. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing Specification Errors in Stochastic Discount Factor Models," NBER Technical Working Papers 0153, National Bureau of Economic Research, Inc.
  9. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 385-415, April.
  10. Ian Martin, 2010. "The Valuation of Long-Dated Assets," NBER Working Papers 16219, National Bureau of Economic Research, Inc.
  11. Andrew Ang & Geert Bekaert, 2004. "The term structure of real rates and expected inflation," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  12. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  13. Michael J. Brennan & Ashley W. Wang & Yihong Xia, 2004. "Estimation and Test of a Simple Model of Intertemporal Capital Asset Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 59(4), pages 1743-1776, 08.
  14. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
  15. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, American Finance Association, vol. 55(5), pages 1943-1978, October.
  16. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 63(3), pages 415-441, March.
  17. Fernando Alvarez & Urban J. Jermann, 2004. "Using Asset Prices to Measure the Cost of Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(6), pages 1223-1256, December.
  18. Lettau, Martin & Wachter, Jessica A., 2011. "The term structures of equity and interest rates," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(1), pages 90-113, July.
  19. Jaroslav Borovička & Mark Hendricks & José A. Scheinkman, 2011. "Risk-Price Dynamics," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 9(1), pages 3-65, Winter.
  20. Ravi Bansal & Robert F. Dittmar & Christian T. Lundblad, 2005. "Consumption, Dividends, and the Cross Section of Equity Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 60(4), pages 1639-1672, 08.
  21. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 645-700.
  22. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
  23. Luis M. Viceira & Adi Sunderam & John Y. Campbell, 2008. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," 2008 Meeting Papers 355, Society for Economic Dynamics.
  24. Ravi Bansal & Robert Dittmar & Dana Kiku, 2009. "Cointegration and Consumption Risks in Asset Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(3), pages 1343-1375, March.
  25. Lars Peter Hansen & John C. Heaton & Nan Li, 2008. "Consumption Strikes Back? Measuring Long-Run Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 116(2), pages 260-302, 04.
  26. Bekaert, Geert & Engstrom, Eric & Grenadier, Steve, 2006. "Stock and Bond Returns with Moody Investors," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5951, C.E.P.R. Discussion Papers.
  27. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 405-443, 02.
  28. Bekaert, Geert & Engstrom, Eric & Xing, Yuhang, 2009. "Risk, uncertainty, and asset prices," Journal of Financial Economics, Elsevier, Elsevier, vol. 91(1), pages 59-82, January.
  29. Bansal, Ravi & Lehmann, Bruce N., 1997. "Growth-Optimal Portfolio Restrictions On Asset Pricing Models," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 1(02), pages 333-354, June.
  30. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 3-25, October.
  31. Monika Piazzesi & Martin Schneider, 2007. "Equilibrium Yield Curves," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 389-472 National Bureau of Economic Research, Inc.
  32. John H. Cochrane & Lars Peter Hansen, 1992. "Asset Pricing Explorations for Macroeconomics," NBER Working Papers 4088, National Bureau of Economic Research, Inc.
  33. Wachter, Jessica A., 2006. "A consumption-based model of the term structure of interest rates," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(2), pages 365-399, February.
  34. Hanno Lustig & Stijn Van Nieuwerburgh & Adrien Verdelhan, 2008. "The Wealth-Consumption Ratio," NBER Working Papers 13896, National Bureau of Economic Research, Inc.
  35. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(3), pages 383-403, July.
  36. Lior Menzly & Tano Santos & Pietro Veronesi, 2004. "Understanding Predictability," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(1), pages 1-47, February.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ralph S.J. Koijen & Stijn Van Nieuwerburgh, 2010. "Predictability of Returns and Cash Flows," NBER Working Papers 16648, National Bureau of Economic Research, Inc.
  2. Backus, David & Chernov, Mikhail & Zin, Stanley E., 2011. "Sources of entropy in representative agent models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8488, C.E.P.R. Discussion Papers.
  3. Philippe Mueller & Andrea Vedolin & Hao Zhou, 2011. "Short Run Bond Risk Premia," FMG Discussion Papers, Financial Markets Group dp686, Financial Markets Group.
  4. Lars Peter Hansen & Jaroslav BoroviÄka & Mark Hendricks & Jose A. Scheinkman, 2010. "Risk Price Dynamics," Working Papers, Becker Friedman Institute for Research In Economics 2010-004, Becker Friedman Institute for Research In Economics.
  5. Jules Vanbinsbergen & Michael W. Brandt & Ralph Koijen, 2010. "On the Timing and Pricing of Dividends," Working Papers, Becker Friedman Institute for Research In Economics 2010-010, Becker Friedman Institute for Research In Economics.
  6. Jesper Rangvid & Maik Schmeling & Andreas Schrimpf, 2009. "Global Asset Pricing: Is There a Role for Long-run Consumption Risk?," CREATES Research Papers 2009-57, School of Economics and Management, University of Aarhus.
  7. Dewandaru, Ginanjar & Masih, Rumi & Bacha, Obiyathulla & Masih, A. Mansur M., 2014. "Combining Momentum, Value, and Quality for the Islamic Equity Portfolio: Multi-style Rotation Strategies using Augmented Black Litterman Factor Model," MPRA Paper 56965, University Library of Munich, Germany.
  8. Jaewon Choi & Matthew P. Richardson & Robert F. Whitelaw, 2014. "On the Fundamental Relation Between Equity Returns and Interest Rates," NBER Working Papers 20187, National Bureau of Economic Research, Inc.
  9. Fernando D. Chague, 2013. "Conditional Betas and Investor Uncertainty," Working Papers, Department of Economics, University of São Paulo (FEA-USP) 2013_04, University of São Paulo (FEA-USP).
  10. Bakshi, Gurdip & Chabi-Yo, Fousseni, 2011. "Variance Bounds on the Permanent and Transitory Components of Stochastic Discount Factors," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2011-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  11. Durham, J. Benson, 2013. "Arbitrage-free models of stocks and bonds," Staff Reports, Federal Reserve Bank of New York 656, Federal Reserve Bank of New York.
  12. Dahlquist, Magnus & Hasseltoft, Henrik, 2013. "International Bond Risk Premia," Journal of International Economics, Elsevier, Elsevier, vol. 90(1), pages 17-32.
  13. Claudio Morana, 2013. "Insights on the global macro-finance interface: Structural sources of risk factors fluctuations and the cross-section of expected stock returns," Working Papers, University of Milano-Bicocca, Department of Economics 264, University of Milano-Bicocca, Department of Economics, revised Dec 2013.
  14. Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(3), pages 586-613.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:15688. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.