Working Paper: NBER ID: w7346
Authors: Geert Bekaert; Steven R. Grenadier
Abstract: This article provides a stochastic valuation framework for bond and stock returns that builds on three different pricing traditions: affine models of the term structure, present-value pricing of equities, and consumption-based asset pricing. Our model provides a more general application of the affine framework in that both bonds and equities are priced in a consistent fashion. This pricing consistency implies that term structure variables help price stocks while stock price fundamentals help price the term structure. We illustrate our model by considering three examples that are similar in spirit to well-known pricing models that fall within our general framework: a Mehra and Prescott (1985) economy, a present value model similar to Campbell and Shiller (1988b), and a model with stochastic risk aversion similar to Campbell and Cochrane (1998). The empirical performance of our models is explored, with a particular emphasis on return predictability.
Keywords: No keywords provided
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| observable state variables (like dividend growth rates) (C29) | bond prices (G12) |
| observable state variables (like dividend growth rates) (C29) | equity returns (G12) |
| term spread (C41) | equity returns (G12) |
| pricing kernel (D49) | bond prices (G12) |
| pricing kernel (D49) | equity returns (G12) |