Macroeconomic Drivers of Bond and Equity Risks
Our new model of consumption-based habit formation preferences generates loglinear, homoskedastic macroeconomic dynamics and time-varying risk premia on bonds and stocks. Consumers' first-order condition for the real risk-free interest rate takes the form of an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. Estimating the model separately for 1979-2001 and 2001-2011 explains why the exposure of US Treasury bonds to the stock market changed from positive to negative. A change in the comovement between inflation and the output gap explains changing bond risks, but only when risk premia change endogenously as predicted by the model.
John Y. Campbell & Carolin Pflueger & Luis M. Viceira, 2020. "Macroeconomic Drivers of Bond and Equity Risks," Journal of Political Economy, vol 128(8), pages 3148-3185.