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Stock vs. bond yields, and demographic fluctutations
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Gozluklu, Arie E. and Morin, Annaig (2019) Stock vs. bond yields, and demographic fluctutations. Journal of Banking & Finance, 109 . 105683. doi:10.1016/j.jbankfin.2019.105683 ISSN 0378-4266.
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Official URL: https://doi.org/10.1016/j.jbankfin.2019.105683
Abstract
This paper analyzes the strong comovement between real stock and nominal bond yields at generational frequencies. Using a stochastic overlapping generations model with cash-in-advance constraints, we show that the simulated life-cycle patterns in savings behavior make both real stock and nominal bond yields comove with the changing population age structure. These persistent comovements account for the equilibrium relation between stock and bond markets. A stochastic Fisher decomposition of nominal bond yields reveals that, while having a moderate effect on both the inflation risk premium and expected inflation, demographic changes affect nominal yields mainly through real bond yields. Using both U.S. data and a cross-country panel, we find empirical support for these theoretical predictions. Finally, we show that the strength of the demographic effect on real yields explains cross-country differences in the comovement between stock and bond markets, while alternative demographic channels fail to explain such cross-country heterogeneity.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HF Commerce H Social Sciences > HG Finance |
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Rate of return -- Demographic aspects, Stocks, Stocks -- Rate of return, Bonds, Stocks -- Rate of return | ||||||||
Journal or Publication Title: | Journal of Banking & Finance | ||||||||
Publisher: | Elsevier Science BV | ||||||||
ISSN: | 0378-4266 | ||||||||
Official Date: | December 2019 | ||||||||
Dates: |
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Volume: | 109 | ||||||||
Article Number: | 105683 | ||||||||
DOI: | 10.1016/j.jbankfin.2019.105683 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Date of first compliant deposit: | 22 October 2019 | ||||||||
Date of first compliant Open Access: | 17 October 2020 | ||||||||
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