Bonds, Aggregate Wealth, and Stock Market Risk
50 Pages Posted: 6 Nov 2011 Last revised: 19 Aug 2013
Date Written: August 5, 2013
Abstract
Bond returns predict consumption growth after controlling for equity returns, which suggests that bonds capture important information about aggregate wealth. Consistent with this, bond risk is priced in the cross section of stocks. Bond risk partially explains momentum profitts and the flat cross-sectional relation between stock index beta and returns. The results suggest that stock indices are an insufficient proxy for aggregate wealth and that bond risk is an important component of consumption risk. Also, term structure-based return predictability often declines with risk, suggesting that time-variation in risk premia is not the sole driver of such predictability.
Keywords: Stock Market, Corporate Bonds, Consumption, Aggregate Wealth, Cross Section
JEL Classification: G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consumption, Aggregate Wealth and Expected Stock Returns
By Martin Lettau and Sydney C. Ludvigson
-
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
By Ravi Bansal and Amir Yaron
-
Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia are Time-Varying
By Martin Lettau and Sydney C. Ludvigson
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia Wre Time-Varying
By Martin Lettau and Sydney C. Ludvigson