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Common shocks in stocks and bonds

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  • Cieslak, Anna
  • Pang, Hao

Abstract

We propose a new approach to identify economic shocks (monetary, growth, and risk-premium news) from stock returns and Treasury yields. The method allows us to study the drivers of asset prices at a daily frequency over the last three-and-a-half decades. We analyze the content of news from the Fed, major macro announcements, and sources of time-varying stock-bond comovement. The results emphasize the importance of two risk-premium shocks—compensation for discount-rate and cash-flow news—which have different effects on stocks and bonds. The impact of the Fed on both risk premiums explains why stocks but not bonds earn high FOMC-day returns.

Suggested Citation

  • Cieslak, Anna & Pang, Hao, 2020. "Common shocks in stocks and bonds," CEPR Discussion Papers 14708, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14708
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    Cited by:

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    2. Piergiorgio Alessandri & Andrea Gazzani & Alejandro Vicondoa, 2021. "The real effects of financial uncertainty shocks: A daily identification approach," Working Papers 61, Red Nacional de Investigadores en Economía (RedNIE).
    3. Höynck, Christian & Rossi, Luca, 2023. "The drivers of market-based inflation expectations in the euro area and in the US," Economics Letters, Elsevier, vol. 232(C).
    4. Bodilsen, Simon & Eriksen, Jonas N. & Grønborg, Niels S., 2021. "Asset pricing and FOMC press conferences," Journal of Banking & Finance, Elsevier, vol. 128(C).
    5. Hanson, Samuel & Malkhozov, Aytek & Venter, Gyuri, 2022. "Demand-supply imbalance risk and long-term swap spreads," LSE Research Online Documents on Economics 118868, London School of Economics and Political Science, LSE Library.
    6. Chao Ying, 2020. "The Pre-FOMC Announcement Drift and Private Information: Kyle Meets Macro-Finance," 2020 Papers pyi149, Job Market Papers.
    7. Don H. Kim & Marcelo Ochoa, 2021. "International Yield Spillovers," Finance and Economics Discussion Series 2021-001, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Stock-bond comovement; Federal Reserve; Risk premia;
    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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