Working Paper: CEPR ID: DP14708
Authors: Anna Cieslak; Hao Pang
Abstract: We propose a new approach to identify economic shocks (monetary, growth, and risk-premium news) from stock returns and Treasury yields. The method allows us to study the drivers of asset prices at a daily frequency over the last three-and-a-half decades. We analyze the content of news from the Fed, major macro announcements, and sources of time-varying stock-bond comovement. The results emphasize the importance of two risk-premium shocks—compensation for discount-rate and cash-flow news—which have different effects on stocks and bonds. The impact of the Fed on both risk premiums explains why stocks but not bonds earn high FOMC-day returns.
Keywords: stock-bond comovement; federal reserve; risk premia
JEL Codes: E43; E44; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive growth news (O49) | stock prices (G12) |
| positive growth news (O49) | yields (G12) |
| good monetary news (E49) | stock prices (G12) |
| good monetary news (E49) | yields (G12) |
| common premium shock (G52) | bond prices (G12) |
| common premium shock (G52) | yields (G12) |
| hedging premium shock (G13) | stock prices (G12) |
| hedging premium shock (G13) | bond prices (G12) |
| risk premium shocks (G19) | stock return increase (G17) |
| monetary easing shocks (E52) | stock return increase (G17) |
| risk premium variations (G19) | high stock returns on FOMC days (G14) |