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: (1) the negative stock-bond return relation largely disappears when controlling for risk movements, at both monthly and weekly horizons; (2) the partial relation between equity-risk changes and 10-year T-bond excess returns (term-slope movements) is reliably positive (negative); and (3) 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.
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https://kenaninstitute.unc.edu/publication/the-stock-%c2%adbond-return-relation-the-term-%c2%adstructures-slope-and-asset%c2%ad-class-risk-dynamics/
