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Market Prices of Risk and Return Predictability in a Joint Stock-Bond Pricing Model

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  • Harry Mamaysky
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    Abstract

    This paper examines the related questions, of the time-series behavior of expected returns and of return predictability, within the framework of the stock-bond pricing model proposed in Mamaysky (2002). The key advantage of the model-based approach adopted in this paper is that the quantities of interest (i.e. expected returns, prices of risk, and R2's of forecasting regressions of returns on their true conditional expectations) are directly observable (once the model has been fitted to the data). Furthermore, the fact that the present model accomodates jointly the pricing of both bonds and stocks allows us to derive estimates of prices of risk and of expected returns that incorporate, by construction, the relevant information from both bond and stock markets. Estimation of the model using U.S. data reveals a rich dynamic structure of prices of risk, some pro- and some countercyclical, and of expected returns. Also, the paper suggests that excess return predictability (as measured by the

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    File URL: http://icfpub.som.yale.edu/publications/2505
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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm297.

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    Date of creation: 01 Aug 2002
    Date of revision: 01 Oct 2002
    Handle: RePEc:ysm:somwrk:ysm297

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    Web page: http://icf.som.yale.edu/
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    Cited by:
    1. Bekaert, Geert & Engstrom, Eric & Grenadier, Steve, 2006. "Stock and Bond Returns with Moody Investors," CEPR Discussion Papers 5951, C.E.P.R. Discussion Papers.
    2. Kassimatis, Konstantinos & Spyrou, Spyros & Galariotis, Emilios, 2008. "Short-term patterns in government bond returns following market shocks: International evidence," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 903-924, December.

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