Article1993

What Moves the Stock and Bond Markets? A Variance Decomposition for Long‐Term Asset Returns

452 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Monetary Policy and Economic Impact Market Dynamics and Volatility

Abstract

ABSTRACT This paper uses a vector autoregressive model to decompose excess stock and 10‐year bond returns into changes in expectations of future stock dividends, inflation, short‐term real interest rates, and excess stock and bond returns. In monthly postwar U.S. data, stock and bond returns are driven largely by news about future excess stock returns and inflation, respectively. Real interest rates have little impact on returns, although they do affect the short‐term nominal interest rate and the slope of the term structure. These findings help to explain the low correlation between excess stock and bond returns.

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References

1989Business conditions and expected returns on stocks and bonds 1988The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors 1988Dividend yields and expected stock returns 1977Asset returns and inflation 1988Stock Prices, Earnings, and Expected Dividends 1985Stock Returns and the Term Structure 1987Cointegration and Tests of Present Value Models 1990A VARIANCE DECOMPOSITION FOR STOCK RETURNS

Cited by

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