TY  - JOUR
AU  - Baele,Lieven
AU  - Bekaert,Geert
AU  - Inghelbrecht,Koen
TI  - The Determinants of Stock and Bond Return Comovements
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15260
PY  - 2009
Y2  - August 2009
UR  - http://www.nber.org/papers/w15260
L1  - http://www.nber.org/papers/w15260.pdf
N1  - Author contact info:
Lieven Baele
Tilburg University
5000 LE Tilburg
The Netherlands
E-Mail: Lieven.Baele@uvt.nl

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

Koen Inghelbrecht
Department Finance
Faculty of Business Administration
and Public Administration
University College Ghent
Voskenslaan 270
B-9000 Gent, Belgium
E-Mail: Koen.Inghelbrecht@hogent.be
AB  - We study the economic sources of stock-bond return comovements and its time variation using a dynamic factor model. We identify the economic factors employing a semi-structural regime-switching model for state variables such as interest rates, inflation, the output gap, and cash flow growth. We also view risk aversion, uncertainty about inflation and output, and liquidity proxies as additional potential factors. We find that macro-economic fundamentals contribute little to explaining stock and bond return correlations, but that other factors, especially liquidity proxies, play a more important role. The macro factors are still important in fitting bond return volatility; whereas the "variance premium" is critical in explaining stock return volatility. However, the factor model primarily fails in fitting covariances.
ER  -