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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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    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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