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|Title: ||The Cross-Section and Time-Series of Stock and Bond Returns|
|Authors: ||Nieuwerburgh, Stijn Van|
Lustig, Hanno N.
Koijen, Ralph S. J.
|Issue Date: ||9-Jan-2012|
|Series/Report no.: ||FIN-11-048|
|Abstract: ||We propose a three-factor model that jointly prices the cross-section of
returns on portfolios of stocks sorted on the book-to-market dimension,
the cross-section of government bonds sorted by maturity, and time
series variation in expected bond returns. The main insight is that
innovations to the nominal bond risk premium price the book-to-market
sorted stock portfolios. We argue that these innovations capture
business cycle risk and show that dividends of the highest
book-to-market portfolio fall substantially more than those of the low
book-to-market portfolio during NBER recessions. We propose a structural
model that ties together the nominal bond risk premium, the
cross-section of book-to-market sorted stock portfolios, and recessions.
This model is quantitatively consistent with the observed value, equity,
and nominal bond risk premia.|
|Appears in Collections:||Finance Working Papers|
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