Working Paper: NBER ID: w3760
Authors: John Y. Campbell; John Ammer
Abstract: 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.
Keywords: stock markets; bond markets; asset pricing; variance decomposition; long-term returns
JEL Codes: G12; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| news about future excess stock returns (G17) | excess stock returns (G12) |
| news about future inflation (E31) | excess 10-year bond returns (G12) |
| real interest rate changes (E43) | excess stock returns (G12) |
| real interest rate changes (E43) | excess 10-year bond returns (G12) |
| real interest rate changes (E43) | short-term nominal interest rates (E43) |
| real interest rate changes (E43) | slope of the term structure (E43) |