DP16381 The real explanation of nominal bond-stock puzzles

Author(s): Mikhail Chernov, Lars Lochstoer, Dongo Song
Publication Date: July 2021
Keyword(s): bond yield curve, bond-stock comovement, equity yield curve, permanent and transitory components of consumption
JEL(s): E21, E31, E43, E44, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16381

We present evidence that the mix of transitory and permanent shocks to consumption is changing over time. We study implications of this finding for asset prices. The uncovered dynamics of consumption implies modestly upward sloping real bond and equity curves, upward sloping nominal yield curve, and sign-switching correlation between equities and bonds consistent with the stylized facts. This is achieved without relying on the nominal channel too much. That is, as in the data, the variation of inflation in the model is under 40% as a fraction of variation in nominal yields.