DP14708 Common shocks in stocks and bonds
Author(s): | Anna Cieslak, Hao Pang |
Publication Date: | May 2020 |
Keyword(s): | Federal Reserve, risk premia, stock-bond comovement |
JEL(s): | E43, E44, G12, G14 |
Programme Areas: | Financial Economics, Monetary Economics and Fluctuations |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=14708 |
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.