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The Stock-Bond Return Relation, the Term Structure’s Slope, and Asset-Class Risk Dynamics

Published online by Cambridge University Press:  12 May 2014

Naresh Bansal,
Robert A. Connolly and
Chris Stivers
Naresh Bansal
Affiliation:
nbansal@slu.edu, Cook School of Business, Saint Louis University, 3674 Lindell Blvd, St. Louis, MO 63108
Robert A. Connolly
Affiliation:
robert_connolly@unc.edu, Kenan-Flagler Business School, University of North Carolina, Campus Box 3490, Chapel Hill, NC 27599
Chris Stivers
Affiliation:
chris.stivers@louisville.edu, College of Business, University of Louisville, 2301 S 3rd St, Louisville, KY 40292.
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Abstract

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We study whether asset-class risk dynamics can help explain the predominantly negative stock-bond return relation and movements in the term structure’s slope over 1997–2011. Using option-derived implied volatilities to measure risk, we find i) the negative stock-bond return relation largely disappears when controlling for risk movements, at both monthly and weekly horizons; ii) the partial relation between equity-risk changes and 10-year T-bond excess returns (term-slope movements) is reliably positive (negative); and iii) a stronger link between equity risk and stock returns implies a more negative stock-bond return correlation. Our results suggest a flight-to-quality influence between equity-risk dynamics and longer-term Treasury pricing.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 3 , June 2014, pp. 699 - 724
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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