The determinants of stock and bond return comovements

L. Baele, G. Beckaert, K. Inghelbrecht

Research output: Contribution to journalArticleScientificpeer-review

169 Citations (Scopus)

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

Fingerprint Dive into the research topics of 'The determinants of stock and bond return comovements'. Together they form a unique fingerprint.

  • 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.