Arbitrage-free models of stocks and bonds
A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treasury term premiums and the term structure of equity risk premiums. Within this approach, this paper identifies the parameter restrictions that are consistent with a simple dividend discount model, extends the cross-section to Germany and France, averages across multiple observable-factor and market prices of risk specifications, and considers alternative samples for parameter estimation. The results produce intuitive trajectories for both sets of premiums given standard samples starting from July 1993. However, the decomposition of nominal U.S. Treasury yields, but not long-run equity risk premiums, is sensitive to data beyond 2008, which raises some questions about the net effects of unconventional monetary policy measures. Nonetheless, the rotation from sharp inversion during the financial crisis to an upward-sloping term structure of equity risk premiums more recently, with modest readings at the front end, is not inconsistent with some net moderation in required compensation for equity risk in the United States.
|Date of creation:||01 Dec 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.newyorkfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.ny.frb.org/rmaghome/staff_rp/ Email: |
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.:
- Ang, Andrew & Piazzesi, Monika, 2003.
"A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables,"
Journal of Monetary Economics,
Elsevier, vol. 50(4), pages 745-787, May.
- 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.
- Lemke, Wolfgang & Werner, Thomas, 2009. "The term structure of equity premia in an affine arbitrage-free model of bond and stock market dynamics," Working Paper Series 1045, European Central Bank.
- Stefano d'Addona & Axel H. Kind, 2005.
"International Stock-Bond Correlations in a Simple Affine Asset Pricing Model,"
- d'Addona, Stefano & Kind, Axel H., 2006. "International stock-bond correlations in a simple affine asset pricing model," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2747-2765, October.
- Kim, Don H. & Orphanides, Athanasios, 2012.
"Term Structure Estimation with Survey Data on Interest Rate Forecasts,"
Journal of Financial and Quantitative Analysis,
Cambridge University Press, vol. 47(01), pages 241-272, April.
- Don H. Kim & Athanasios Orphanides, 2005. "Term structure estimation with survey data on interest rate forecasts," Finance and Economics Discussion Series 2005-48, Board of Governors of the Federal Reserve System (U.S.).
- Athanasios Orphanides & Don H. Kim, 2005. "Term Structure Estimation with Survey Data on Interest Rate Forecasts," Computing in Economics and Finance 2005 474, Society for Computational Economics.
- Kim, Don H. & Orphanides, Athanasios, 2005. "Term Structure Estimation with Survey Data on Interest Rate Forecasts," CEPR Discussion Papers 5341, C.E.P.R. Discussion Papers.
- Clive W. J. Granger & Harald F. Uhlig, 1988.
"Reasonable extreme bounds analysis,"
Discussion Paper / Institute for Empirical Macroeconomics
2, Federal Reserve Bank of Minneapolis.
- Ralph S.J. Koijen & Hanno Lustig & Stijn Van Nieuwerburgh, 2010.
"The Cross-Section and Time-Series of Stock and Bond Returns,"
NBER Working Papers
15688, National Bureau of Economic Research, Inc.
- Koijen, Ralph & Lustig, Hanno & van Nieuwerburgh, Stijn, 2012. "The Cross-Section and Time-Series of Stock and Bond Returns," CEPR Discussion Papers 9024, C.E.P.R. Discussion Papers.
When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:656. 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: (Amy Farber)
If references are entirely missing, you can add them using this form.