VGSF - WU Vienna - LC

Anna Cieslak, Duke University, Fuqua School of Business

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Anna Cieslak from the Duke Uni­versity, Fuqua School of Busi­ness to present her re­search pa­per.
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Com­mon Shocks in Stocks and Bonds

Us­ing vari­ation in the stock mar­ket and the Treas­ury yield curve, we identify shocks to in­vestors’ ex­pect­a­tions of mon­et­ary policy and eco­nomic growth as well as pure risk-­premium shocks. We trace out the ef­fects of those shocks day-by-day, and ex­plain the puzz­ling fact that stocks but not bonds earn high aver­age re­turns on Fed­eral Open Mar­ket Com­mit­tee (FOMC) an­nounce­ment days and over the FOMC cycle. About 70% of the aver­age pos­it­ive stock re­turns earned over the FOMC cycle stems from the de­clin­ing premi­ums, with the re­main­ing 25% ex­plained by ac­com­mod­at­ing mon­et­ary news, and only a small frac­tion by pos­it­ive growth news. While Treas­ury bonds respond strongly to the same shocks, the signs of their re­sponses are am­bigu­ous as bonds hedge the cash-­flow risk in stocks. Re­duc­tions in the bonds' in­sur­ance premium nearly com­pletely off­set any gains, mak­ing over­all bond re­turns eco­nom­ic­ally small and stat­ist­ic­ally in­sig­ni­fic­ant. We also doc­u­ment that since the mid-1980s, mon­et­ary news ac­counts for about 40% of the vari­ation in the two-year yield, but less than 10% and 20% of the vari­ation in the ten-year yield and the ag­greg­ate stock mar­ket, re­spect­ively. The res­ults sug­gest that the Fed has a sig­ni­fic­ant ef­fect on long-­dur­a­tion as­sets through its ab­il­ity to af­fect the risk premi­ums.

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