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

Listed author(s):
  • Campbell, John Y
  • Ammer, John

This paper uses a vector autoregressive model to decompose excess stock and ten-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 postwa r U.S. data, stock and bond returns are driven largely by news about future excess stock returns and inflation, respectively. Real intere st 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 st ock and bond returns. Copyright 1993 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 48 (1993)
Issue (Month): 1 (March)
Pages: 3-37

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Handle: RePEc:bla:jfinan:v:48:y:1993:i:1:p:3-37
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  1. Matthew Richardson & James H. Stock, 1990. "Drawing Inferences From Statistics Based on Multi-Year Asset Returns," NBER Working Papers 3335, National Bureau of Economic Research, Inc.
  2. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
  3. Shiller, Robert J. & Beltratti, Andrea E., 1992. "Stock prices and bond yields : Can their comovements be explained in terms of present value models?," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 25-46, October.
  4. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  5. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  6. Nelson, C.R. & Kim, M.J., 1990. "Predictable Stock Returns: Reality Or Statistical Illusion?," Discussion Papers in Economics at the University of Washington 90-15, Department of Economics at the University of Washington.
  7. Robert J. Shiller & J. Huston McCulloch, 1987. "The Term Structure of Interest Rates," NBER Working Papers 2341, National Bureau of Economic Research, Inc.
  8. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1988. "What Moves Stock Prices?," NBER Working Papers 2538, National Bureau of Economic Research, Inc.
  9. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
  10. James H. Stock & Mark W. Watson, 1990. "Business Cycle Properties of Selected U.S. Economic Time Series, 1959-1988," NBER Working Papers 3376, National Bureau of Economic Research, Inc.
  11. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
  12. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
  13. Mishkin, Frederic S., 1990. "What does the term structure tell us about future inflation?," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 77-95, January.
  14. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  15. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
  16. Cecchetti, Stephen G & Lam, Pok-sang & Mark, Nelson C, 1990. "Mean Reversion in Equilibrium Asset Prices," American Economic Review, American Economic Association, vol. 80(3), pages 398-418, June.
  17. Campbell, J.Y. & Shiller, R.J., 1988. "Stock Prices, Earnings And Expected Dividends," Papers 334, Princeton, Department of Economics - Econometric Research Program.
  18. Fama, Eugene F., 1990. "Term-structure forecasts of interest rates, inflation and real returns," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 59-76, January.
  19. Shiller, Robert & Campbell, John, 1984. "A Simple Account of the Behavior of Long-Term Interest Rates," Scholarly Articles 3208216, Harvard University Department of Economics.
  20. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
  21. Campbell, John Y, 1990. "Measuring the Persistence of Expected Returns," American Economic Review, American Economic Association, vol. 80(2), pages 43-47, May.
  22. Donald B. Keim & Robert F. Stambaugh, "undated". "Predicting Returns in the Stock and Bond Markets," Rodney L. White Center for Financial Research Working Papers 15-85, Wharton School Rodney L. White Center for Financial Research.
  23. Litterman, Robert B & Weiss, Laurence M, 1985. "Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data," Econometrica, Econometric Society, vol. 53(1), pages 129-156, January.
  24. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990. "Speculative Dynamics," NBER Working Papers 3242, National Bureau of Economic Research, Inc.
  25. Gibbons, Michael R., 1989. "On the volatility of bond prices," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 31(1), pages 139-175, January.
  26. 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.
  27. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-386.
  28. Bruce N. Lehmann, 1991. "Earnings, Dividend Policy, and Present Value Relations: Building Blocks of Dividend Policy Invariant Cash Flows," NBER Working Papers 3676, National Bureau of Economic Research, Inc.
  29. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-692, September.
  30. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
  31. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," The Journal of Business, University of Chicago Press, vol. 61(4), pages 409-425, October.
  32. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  33. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
  34. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
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