Abstract
I analyze the risk of nominal assets within an external habit model supplemented with realistic non-Gaussian macroeconomic dynamics. The estimation identifies time-varying demand-like and supply-like macroeconomic shocks directly linked to the risk of nominal assets. After matching standard properties of the US financial markets, I investigate if macroeconomic shocks can reproduce time-varying stock and bond return correlations. Macroeconomic shocks generate sizable positive and negative correlations, although negative correlations are less extreme than in data. Macroeconomics shocks are most important in explaining high correlations from the late 70's until the early 90's and low correlations pre- 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