"Stock and Bond Returns with Moody Investors"
Journal of Empirical Finance,
Volume: 17 | Issue: 5 | Pages: 867-894
Publication type: Journal article
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 that in the data.
The PDF above is a preprint version of the published article. The final version may be found at < http://dx.doi.org/110.1016/j.jempfin.2010.08.004 >.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.