Stock and Bond Returns with Moody Investors

63 Pages Posted: 25 May 2006 Last revised: 19 Dec 2022

See all articles by Geert Bekaert

Geert Bekaert

Columbia University - Columbia Business School, Finance

Eric Engstrom

Board of Governors of the Federal Reserve System

Steven R. Grenadier

Stanford Graduate School of Business

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Date Written: May 2006

Abstract

We present a tractable, linear model for the simultaneous pricing of stock and bond returns that incorporates stochastic risk aversion. In this model, analytic solutions for endogenous stock and bond prices and returns are readily calculated. After estimating the parameters of the model by the general method of moments, we investigate a series of classic puzzles of the empirical asset pricing literature. In particular, our model is shown to jointly accommodate the mean and volatility of equity and long term bond risk premia as well as salient features of the nominal short rate, the dividend yield, and the term spread. Also, the model matches the evidence for predictability of excess stock and bond returns. However, the stock-bond return correlation implied by the model is somewhat higher than in the data.

Suggested Citation

Bekaert, Geert and Engstrom, Eric C. and Grenadier, Steven R., Stock and Bond Returns with Moody Investors (May 2006). NBER Working Paper No. w12247, Available at SSRN: https://ssrn.com/abstract=903885

Geert Bekaert (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

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Eric C. Engstrom

Board of Governors of the Federal Reserve System ( email )

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Steven R. Grenadier

Stanford Graduate School of Business ( email )

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