We attempt to better understand the correlation between stock and bond returns, an
important factor in asset allocation, based on income and substitution effects. We
show that there are two forces that affect the relation between stock and bond
returns in a simple general equilibrium model. Changes in economic activity tend to
affect the values of stocks and bonds in the same direction. This induces the
income effect that results in a positive relation between stock and bond returns.
On the other hand, uncertainty (or risk) about economic activity may have an pposite
effect on the values of stocks and bonds. This induces the substitution effect that
results in a negative relation between stock and bond returns. In combination, the
two effects help determine the actual correlation between stock and bond returns.
By empirically identifying the two forces, we find that our hypothesis of the ncome
and substitution effects can explain not only diverse correlations across countries
but also different correlations over time for each country. We also find some
evidence that the income and substitution effects are related to the size of the
financial market, the growth of the economy, and the business cycle over time.
학회소식
공지사항
[2003년 제 2차] Understanding Correlations between Stock Returns an
작성자 : 관리자
조회수 : 936
게시일 :
2003-07-12