IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v79y1989i5p1132-45.html
   My bibliography  Save this article

Why Don't the Prices of Stocks and Bonds Move Together?

Author

Listed:
  • Barsky, Robert B

Abstract

The 1970s were associated with very low real interest rates and a large drop in equity values relative to dividends and earnings. This paper explores the possible roles of increased risk and reduced productivity growth in accounting for the behavior of bond and stock prices in a simple general equilibrium model. Both disturbances unambiguously lower the riskless interest rate, but may cause the stock market to respond perversely depending on the degree of aversion to intertemporal substitution and the share of the corporate sector in total wealth. Copyright 1989 by American Economic Association.

Suggested Citation

  • Barsky, Robert B, 1989. "Why Don't the Prices of Stocks and Bonds Move Together?," American Economic Review, American Economic Association, vol. 79(5), pages 1132-1145, December.
    • Handle: RePEc:aea:aecrev:v:79:y:1989:i:5:p:1132-45
    as

    Download full text from publisher

    File URL: http://links.jstor.org/sici?sici=0002-8282%28198912%2979%3A5%3C1132%3AWDTPOS%3E2.0.CO%3B2-7&origin=repec
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. John Y. Campbell, 1986. "Bond and Stock Returns in a Simple Exchange Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 785-803.
    3. Poterba, James M & Summers, Lawrence H, 1986. "The Persistence of Volatility and Stock Market Fluctuations," American Economic Review, American Economic Association, vol. 76(5), pages 1142-1151, December.
    4. Mankiw, N Gregory & Romer, David & Shapiro, Matthew D, 1985. "An Unbiased Reexamination of Stock Market Volatility," Journal of Finance, American Finance Association, vol. 40(3), pages 677-687, July.
    5. Hendershott, Patric H, 1981. "The Decline in Aggregate Share Values: Taxation, Valuation Errors, Risk and Profitability," American Economic Review, American Economic Association, vol. 71(5), pages 909-922, December.
    6. James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers 339, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Greenwood, Jeremy & Huffman, Gregory W., 1987. "A dynamic equilibrium model of inflation and unemployment," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 203-228, March.
    8. Sundaresan, Mahadevan, 1984. "Consumption and Equilibrium Interest Rates in Stochastic Production Economies," Journal of Finance, American Finance Association, vol. 39(1), pages 77-92, March.
    9. Robert E. Hall, 1985. "Real Interest and Consumption," NBER Working Papers 1694, National Bureau of Economic Research, Inc.
    10. Rajnish Mehra, 2006. "Recursive Competitive Equilibrium," NBER Working Papers 12433, National Bureau of Economic Research, Inc.
    11. Sandmo, Agnar, 1969. "Capital Risk, Consumption, and Portfolio Choice," Econometrica, Econometric Society, vol. 37(4), pages 586-599, October.
    12. John B. Donaldson & Rajnish Mehra, 1984. "Comparative Dynamics of an Equilibrium Intertemporal Asset Pricing Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 491-508.
    13. Zvi Bodie & Alex Kane & Robert McDonald, 1985. "Inflation and the Role of Bonds in Investor Portfolios," NBER Chapters, in: Corporate Capital Structures in the United States, pages 167-196, National Bureau of Economic Research, Inc.
    14. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    15. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December.
    16. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    17. Pindyck, Robert S, 1984. "Risk, Inflation, and the Stock Market," American Economic Review, American Economic Association, vol. 74(3), pages 335-351, June.
    18. Olivier J. Blanchard & Lawrence H. Summers, 1984. "Perspectives on High World Real Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 273-334.
    19. William A. Brock, 1982. "Asset Prices in a Production Economy," NBER Chapters, in: The Economics of Information and Uncertainty, pages 1-46, National Bureau of Economic Research, Inc.
    20. John J. McCall, 1982. "The Economics of Information and Uncertainty," NBER Books, National Bureau of Economic Research, Inc, number mcca82-1, March.
    21. Malkiel, Burton G, 1979. "The Capital Formation Problem in the United States," Journal of Finance, American Finance Association, vol. 34(2), pages 291-306, May.
    22. Martin Feldstein, 1983. "Inflation and the Stock Market," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 186-198, National Bureau of Economic Research, Inc.
    23. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 729-752.
    24. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    25. Shiller, Robert J., 1982. "Consumption, asset markets and macroeconomic fluctuations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 203-238, January.
    26. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    27. Edward C. Prescott & Rajnish Mehra, 2005. "Recursive Competitive Equilibrium: The Case Of Homogeneous Households," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 11, pages 357-371, World Scientific Publishing Co. Pte. Ltd..
    28. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
    29. Fama, Eugene F, 1976. "Inflation Uncertainty and Expected Returns on Treasury Bills," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 427-448, June.
    30. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    31. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    32. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
    33. Lawrence H. Summers, 1982. "The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect," NBER Working Papers 0836, National Bureau of Economic Research, Inc.
    34. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-574, May.
    35. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-380, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-1214, December.
    2. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    3. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887, Elsevier.
    4. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    5. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    6. Guidolin, Massimo & Timmermann, Allan, 2007. "Properties of equilibrium asset prices under alternative learning schemes," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 161-217, January.
    7. Mehra, Rajnish, 2010. "Indian Equity Markets: Measures of Fundamental Value," India Policy Forum, National Council of Applied Economic Research, vol. 6(1), pages 1-38.
    8. Kumar, Praveen, 2006. "Learning about investment risk: The effects of structural uncertainty on dynamic investment and consumption," Journal of Economic Behavior & Organization, Elsevier, vol. 60(2), pages 205-229, June.
    9. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    10. Thomas A. Rietz, 1989. "Continuous Time Research and Development Investment and Innovation: Effects on Price and Dividend Paths," Discussion Papers 1012, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Cochrane, John H., 2005. "Financial Markets and the Real Economy," Foundations and Trends(R) in Finance, now publishers, vol. 1(1), pages 1-101, July.
    12. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    13. Robert P. Flood & Robert J. Hodrick, 1989. "Testable Implications of Indeterminacies in Models with Rational Expectations," NBER Working Papers 2903, National Bureau of Economic Research, Inc.
    14. Akdeniz, Levent & Salih, Aslıhan Altay & Ok, Süleyman Tuluğ, 2007. "Are stock prices too volatile to be justified by the dividend discount model?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 376(C), pages 433-444.
    15. Drees, Burkhard & Eckwert, Bernhard, 2000. "Price volatility and risk with non-separability of preferences," Mathematical Social Sciences, Elsevier, vol. 39(1), pages 21-34, January.
    16. Miles S. Kimball, 1990. "Precautionary Saving and the Marginal Propensity to Consume," NBER Working Papers 3403, National Bureau of Economic Research, Inc.
    17. John Y. Campbell, 1996. "Consumption and the Stock Market: Interpreting International Experience," Harvard Institute of Economic Research Working Papers 1763, Harvard - Institute of Economic Research.
    18. Christian Gollier & James Hammitt & Nicolas Treich, 2013. "Risk and choice: A research saga," Journal of Risk and Uncertainty, Springer, vol. 47(2), pages 129-145, October.
    19. Ravi Bansal, 2007. "Long-run risks and financial markets," Review, Federal Reserve Bank of St. Louis, vol. 89(Jul), pages 283-300.
    20. Mark Huggett, 2004. "Precautionary Wealth Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 769-781.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:79:y:1989:i:5:p:1132-45. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.