Journal of Financial and Quantitative Analysis Vol. 49 No. 3 2014
The Stock-Bond Return Relation, the Term Structure’s Slope, and Asset-Class Risk Dynamics
Abstract
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.
- DOI
- 10.1017/s0022109014000258
- Volume
- 49
- Issue
- 3
- Pages
- 699-724
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex