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Regime shifts in a long-run risks model of stock and treasury bond markets.
- Source :
- China Finance Review International; 2022, Vol. 12 Issue 4, p541-570, 30p
- Publication Year :
- 2022
-
Abstract
- Purpose: This paper aims to study the asset pricing implications for stock and bond markets in a long-run risks (LRR) model with regime shifts. This general equilibrium framework can not only generate sign-switching stock-bond correlations and bond risk premium, but also quantitatively reproduce various other salient empirical features in stock and bond markets, including time-varying equity and bond return premia, regime shifts in real and nominal yield curves, the violation of the expectations hypothesis of bond returns. Design/methodology/approach: The researchers study the joint determinants of stock and bond returns in a LRR model framework with regime shifts in consumption and inflation dynamics. In particular, the means, volatilities, and the correlation structure between consumption growth and inflation are regime-dependent. Findings: The model shows that the term structure of interest rates and stock-bond correlation are intimately related to business cycles, while LRR play a more important role in accounting for high equity premium than do business cycle risks. Originality/value: This paper studies the joint determinants of stock and bond returns in a Bansal and Yaron (2004) type of LRR framework. This rational expectations general equilibrium framework can (1) jointly match the dynamics of consumption, inflation and cash flow; (2) generate time-varying and sign-switching stock and bond correlations, as well as generating sign-switching bond risk premium; and (3) coherently explain another long list of salient empirical features in stock and bond markets, including time-varying equity and bond return premia, regime shifts in real and nominal yield curves, the violation of the expectations hypothesis of bond returns. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 20441398
- Volume :
- 12
- Issue :
- 4
- Database :
- Complementary Index
- Journal :
- China Finance Review International
- Publication Type :
- Academic Journal
- Accession number :
- 159564643
- Full Text :
- https://doi.org/10.1108/CFRI-06-2022-0106