NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns

John Y. Campbell, John Ammer

NBER Working Paper No. 3760
Issued in June 1991
NBER Program(s):   ME

This paper uses a log-linear asset pricing framework and a vector autoregressive model to break down movements in stock and bond returns into changes in expectations of future stock dividends, inflation, short-term real interest rates, and excess returns on stocks and bonds. In monthly postwar U.S. data, excess stock returns are found to be driven largely by news about future excess stock returns, while excess 10-year bond returns are driven largely by news about future inflation. Real interest rate changes have little impact on either stock or 10-year bond returns, although they do affect the short-term nominal interest rate and the slope of the term structure. These findings help to explain why postwar excess stock and bond returns have been almost uncorrelated.

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Document Object Identifier (DOI): 10.3386/w3760

Published: Journal of Finance, vol 48, March 1993, p.3-37

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