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Stocks, Bonds, and Long-Run Consumption Risks

Published online by Cambridge University Press:  17 January 2012

Henrik Hasseltoft
Henrik Hasseltoft*
Affiliation:
University of Zurich, Rämistrasse 71, Zurich CH-8006, Switzerland, and the Swiss Finance Institute. henrik.hasseltoft@bf.uzh.ch
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Abstract

I evaluate whether the so-called long-run risk framework can jointly explain key features of both equity and bond markets as well as the interaction between asset prices and the macroeconomy. I find that shocks to expected consumption growth and time-varying macroeconomic volatility can account for the level of risk premia and its variation over time in both markets. The results suggest a common set of macroeconomic risk factors operating in equity and bond markets. I estimate the model using a simulation estimator that accounts for time aggregation of consumption growth and utilizes a rich set of moment conditions.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 2 , April 2012 , pp. 309 - 332
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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