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The cross-section and time series of stock and bond returns

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  • Koijen, Ralph S.J.
  • Lustig, Hanno
  • Van Nieuwerburgh, Stijn

Abstract

Bond factors which predict future U.S. economic activity at business cycle horizons are priced in the cross-section of U.S. stock returns. High book-to-market stocks have larger exposures to these bond factors than low book-to-market stocks, because their cash flows are more sensitive to the business cycle. Because of this new nexus between stock and bond markets, a parsimonious three-factor dynamic no-arbitrage model can be used to jointly price book-to-market-sorted portfolios of stocks and maturity-sorted bond portfolios, while reproducing the time-series variation in expected bond returns. The business cycle itself is a priced state variable in stock and bond markets.

Suggested Citation

  • Koijen, Ralph S.J. & Lustig, Hanno & Van Nieuwerburgh, Stijn, 2017. "The cross-section and time series of stock and bond returns," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 50-69.
    • Handle: RePEc:eee:moneco:v:88:y:2017:i:c:p:50-69
    DOI: 10.1016/j.jmoneco.2017.05.006
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    More about this item

    Keywords

    Value premium; Bond risk premium; Business cycles and asset pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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