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Stock and Bond Returns with Moody Investors

Author Info

Listed author(s):
  • Geert Bekaert
  • Eric Engstrom
  • Steven R. Grenadier

Abstract

We present a tractable, linear model for the simultaneous pricing of stock and bond returns that incorporates stochastic risk aversion. In this model, analytic solutions for endogenous stock and bond prices and returns are readily calculated. After estimating the parameters of the model by the general method of moments, we investigate a series of classic puzzles of the empirical asset pricing literature. In particular, our model is shown to jointly accommodate the mean and volatility of equity and long term bond risk premia as well as salient features of the nominal short rate, the dividend yield, and the term spread. Also, the model matches the evidence for predictability of excess stock and bond returns. However, the stock-bond return correlation implied by the model is somewhat higher than in the data.

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File URL: http://www.nber.org/papers/w12247.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12247.

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Date of creation: May 2006
Publication status: published as Bekaert, Geert & Engstrom, Eric & Grenadier, Steven R., 2010. "Stock and bond returns with Moody Investors," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 867-894, December.
Handle: RePEc:nbr:nberwo:12247
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Find related papers by JEL classification:
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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