Journal of Financial and Quantitative Analysis

Table of Contents - April 2012 - Volume 47, Issue 02  

Research Articles

Stocks, Bonds, and Long-Run Consumption Risks

Henrik Hasseltofta1

a1 University of Zurich, Rämistrasse 71, Zurich CH-8006, Switzerland, and the Swiss Finance Institute. henrik.hasseltoft@bf.uzh.ch

Abstract

I evaluate whether the so-called long-run risk framework can jointly explain key features of both equity and bond markets as well as the interaction between asset prices and the macroeconomy. I find that shocks to expected consumption growth and time-varying macroeconomic volatility can account for the level of risk premia and its variation over time in both markets. The results suggest a common set of macroeconomic risk factors operating in equity and bond markets. I estimate the model using a simulation estimator that accounts for time aggregation of consumption growth and utilizes a rich set of moment conditions.

Footnotes

I thank Ravi Bansal, Stephen Brown (the editor), Magnus Dahlquist, Lars Lochstoer, Bryan Routledge (associate editor and referee), seminar participants at the Stockholm School of Economics (SSE) and the Stockholm Institute for Financial Research (SIFR), and people at Barclays Global Investors for helpful comments. Financial support from Bankforskningsinstitutet is gratefully acknowledged. This paper circulated earlier under the title “The Long-Run Risk Model: Dynamics and Cyclicality of Interest Rates.” All errors are mine.