The determinants of stock and bond return comovements

L. Baele, G. Beckaert, K. Inghelbrecht

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We study the economic sources of stock-bond return comovements and their time variation using a dynamic factor model. We identify the economic factors employing a semi structural regime-switching model for state variables such as interest rates, inflation, the output gap, and cash flow growth. We also view risk aversion, uncertainty about inflation and output, and liquidity proxies as additional potential factors. We find that macroeconomic fundamentals contribute little to explaining stock and bond return correlations but that other factors, especially liquidity proxies, play a more important role. The macro factors are still important in fitting bond return volatility, whereas the “variance premium” is critical in explaining stock return volatility. However, the factor model primarily fails in fitting covariances.
Original languageEnglish
Pages (from-to)2374-2428
JournalThe Review of Financial Studies
Volume23
Issue number6
Publication statusPublished - 2010

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Bond returns
Stock returns
Comovement
Liquidity
Factors
Time variation
Dynamic factor model
Stock return volatility
Macroeconomic fundamentals
Inflation uncertainty
Interest rates
Economics
Inflation
Output gap
Risk aversion
Macro factors
Cash flow
Regime-switching model
State variable
Premium

Cite this

Baele, L., Beckaert, G., & Inghelbrecht, K. (2010). The determinants of stock and bond return comovements. The Review of Financial Studies, 23(6), 2374-2428.
Baele, L. ; Beckaert, G. ; Inghelbrecht, K. / The determinants of stock and bond return comovements. In: The Review of Financial Studies. 2010 ; Vol. 23, No. 6. pp. 2374-2428.
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Baele, L, Beckaert, G & Inghelbrecht, K 2010, 'The determinants of stock and bond return comovements', The Review of Financial Studies, vol. 23, no. 6, pp. 2374-2428.

The determinants of stock and bond return comovements. / Baele, L.; Beckaert, G.; Inghelbrecht, K.

In: The Review of Financial Studies, Vol. 23, No. 6, 2010, p. 2374-2428.

Research output: Contribution to journalArticleScientificpeer-review

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