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Common shocks in stocks and bonds

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  • Cieslak, Anna
  • Pang, Hao

Abstract

We propose an approach to identify economic shocks (monetary, growth, and risk premium news) from stock returns and Treasury yield changes, which allows us to study the drivers of asset prices at a daily frequency since the early 1980s. We apply the identification to examine investors’ responses to news from the Fed and key macro announcements. We uncover two risk premium shocks—time-varying compensation for discount rate and cash flow news—which have distinct effects on stocks and bonds. Since the mid-1990s, the Fed-induced reductions in both risk premium sources have generated high average stock returns but an ambiguous response in bonds on FOMC days.

Suggested Citation

  • Cieslak, Anna & Pang, Hao, 2021. "Common shocks in stocks and bonds," Journal of Financial Economics, Elsevier, vol. 142(2), pages 880-904.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:2:p:880-904
    DOI: 10.1016/j.jfineco.2021.06.008
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    Cited by:

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    4. Akkaya, Yıldız & Bitter, Lea & Brand, Claus & Fonseca, Luís, 2024. "A statistical approach to identifying ECB monetary policy," Working Paper Series 2994, European Central Bank.
    5. Hanson, Samuel G. & Malkhozov, Aytek & Venter, Gyuri, 2024. "Demand-and-supply imbalance risk and long-term swap spreads," Journal of Financial Economics, Elsevier, vol. 154(C).
    6. Gazzani, Andrea & Venditti, Fabrizio & Veronese, Giovanni, 2024. "Oil price shocks in real time," Journal of Monetary Economics, Elsevier, vol. 144(C).
    7. Goodhead, Robert, 2024. "The economic impact of yield curve compression: Evidence from euro area forward guidance and unconventional monetary policy," European Economic Review, Elsevier, vol. 164(C).
    8. Karnaukh, Nina & Vokata, Petra, 2022. "Growth forecasts and news about monetary policy," Journal of Financial Economics, Elsevier, vol. 146(1), pages 55-70.
    9. Cui, Baisheng & Li, Jiaqi & Zhang, Yi, 2024. "Asymmetries in the international spillover effects of monetary policy: Based on TGVAR model," The North American Journal of Economics and Finance, Elsevier, vol. 69(PA).
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    11. Alessandri, Piergiorgio & Gazzani, Andrea & Vicondoa, Alejandro, 2023. "Are the effects of uncertainty shocks big or small?," European Economic Review, Elsevier, vol. 158(C).
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    13. Wataru Miyamoto & Thuy Lan Nguyen & Dmitry Sergeyev, 2023. "How Oil Shocks Propagate: Evidence on the Monetary Policy Channel," Working Paper Series 2024-06, Federal Reserve Bank of San Francisco.
    14. Alex Hsu & Indrajit Mitra & Yu Xu & Linghang Zeng, 2023. "The Fed Information Effect and Firm-Level Investment: Evidence and Theory," FRB Atlanta Working Paper 2023-6a, Federal Reserve Bank of Atlanta, revised Mar 2024.
    15. Carlomagno, Guillermo & Albagli, Elías, 2022. "Trade wars and asset prices," Journal of International Money and Finance, Elsevier, vol. 124(C).
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    17. Chen, Yong & Fang, Jing & Liu, Dingming, 2023. "The effects of Trump’s trade war on U.S. financial markets," Journal of International Money and Finance, Elsevier, vol. 134(C).
    18. Nicolas Eterovic & Dalibor Eterovic, 2022. "Stocks, Bonds and the US Dollar - Measuring Domestic and International Market Developments in an Emerging Market," Working Papers Central Bank of Chile 964, Central Bank of Chile.
    19. Gregory R. Duffee, 2023. "Macroeconomic News in Asset Pricing and Reality," Journal of Finance, American Finance Association, vol. 78(3), pages 1499-1543, June.
    20. Jang, Bosung & So, Inhwan & Tong, Eric, 2023. "US structural drivers of international portfolio returns," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Structural shocks; Federal Reserve; announcements; Risk premia; Stock-bond comovement;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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