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Title: Common shocks in stocks and bonds

Author(s): Anna Cieslak and Hao Pang

Publication Date: May 2020

Keyword(s): Federal Reserve, risk premia and stock-bond comovement

Programme Area(s): Financial Economics and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Cieslak, A and Pang, H. 2020. 'Common shocks in stocks and bonds'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14708