Abstract
I study the sufficiency of macroeconomic information to explain the time-variation in second moments of stock and bond returns, with a particular attention to stock-bond correlations. I propose an external habit model supplemented with realistic non-Gaussian fundamentals estimated solely from macroeconomic data. Intertemporal smoothing and precautionary savings effects – driven by consumption shocks – combine with a time-varying covariance between consumption and inflation to generate large positive and negative stock-bond return correlations. Macroeconomic shocks are most important in explaining second moments of stock and bond returns from the late 1970’s to mid-1990’s and during the Great Recession.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call