Monetary policy drivers of bond and equity risks
By: John Y. Campbell, Carolin E. Pflueger, Luis M. Viceira
Contributors: Pflueger, Carolin E., author; Viceira, Luis M., author; Harvard Business School
Edition: Revised edition
Series: Working paper / Harvard Business School -- 14-031; Working paper (Harvard Business School) -- 14-031.
Publisher: Harvard Business School
Published: 2014
Place of publication: Boston]
Language: eng
Number of pages: 59
Description: The exposure of US Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average in the period 1960-2011, it was unusually high in the 1980s and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper explores the effects of monetary policy parameters and macroeconomic shocks on nominal bond risks, using a New Keynesian model with habit formation and discrete regime shifts in 1979 and 1997. The increase in bond risks after 1979 is attributed primarily to a shift in monetary policy towards a more anti-inflationary stance, while the more recent decrease in bond risks after 1997 is attributed primarily to a renewed emphasis on output stabilization and an increase in the persistence of monetary policy. Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks.
Notes: "September 2013. (Revised April 2014.)"--Publisher's Web site.

Includes bibliographical references (pages 52-59).