TY  - JOUR
AU  - Bekaert,Geert
AU  - Engstrom,Eric
AU  - Grenadier,Steven R.
TI  - Stock and Bond Returns with Moody Investors
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12247
PY  - 2006
Y2  - May 2006
UR  - http://www.nber.org/papers/w12247
L1  - http://www.nber.org/papers/w12247.pdf
N1  - Author contact info:
Geert Bekaert
Graduate School of Business
Columbia University
3022 Broadway, 411 Uris Hall
New York, NY 10027
Tel: 212/854-9156
Fax: 212/662-8474
E-Mail: gb241@columbia.edu

Eric Engstrom
Board of Governors of the Federal Reserve System
Washington DC 20551
Tel: 734-763-6391
Fax: 734-764-3146
E-Mail: eric.engstrom@frb.gov

Steven Grenadier
Graduate School of Business
Stanford University
Stanford, CA  94305
Tel: 650/725-0706
Fax: 650/725-6152
E-Mail: sgren@stanford.edu
M2  - featured in NBER digest on 2006-05-22
AB  - 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.
ER  -