Working Paper: NBER ID: w1142
Authors: Patric H. Hendershott; Roger D. Huang
Abstract: The study is divided into four broad parts, beginning with an exploratory analysis of the data on expost returns on corporate equities and bonds for the 1926-80 period. In Part 2, we estimate the relationships between one-month expost returns on corporate bonds and equities andvariations in Treasury bill rates, economic activity, and other variables.The major other variable is unanticipated changes in new issue coupon rates on long-term Treasury bonds. Parts 3 and 4 contain econometric investigations of the determinants of one-month Treasury bill rates and unanticipated changes in long-term Treasury coupon rates, respectively. These parts extend the analysis of Part 2 by explaining variables that determine expost corporate bond and equity returns and provide evidence on the determination of new-issue yields on short- and long-term default-free debt. The last three parts ofthe study report econometric results based on data from the 1953-83 period.A number of important issues are addressed in the econometric parts of the paper. These include: the validity of the Modigliani-Cohn valuation-error hypothesis, the measurement of Merton's "excess return on the market", the relationship between real new-issue debt rates and real economic activity, and the usefulness of the Livingston survey data in explaining financial returns.
Keywords: debt; equity; yields; returns; inflation; interest rates
JEL Codes: G12; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Treasury bill rates (E43) | ex post returns on corporate bonds (G12) |
| Treasury bill rates (E43) | ex post returns on equities (G12) |
| New issue coupon rates on long-term treasury bonds (E43) | ex post returns on equities (G12) |
| New issue coupon rates on long-term treasury bonds (E43) | ex post returns on corporate bonds (G12) |
| Unexpected inflation (E31) | ex post returns on equities (G12) |
| Investors' perceptions of nominal vs real returns (G19) | equity performance during inflationary periods (E31) |