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Consumption Growth Persistence and the Stock–Bond Correlation

Published online by Cambridge University Press:  01 April 2024

Christopher S. Jones  and
Sungjune Pyun Open the ORCID record for Sungjune Pyun [Opens in a new window]
Christopher S. Jones
Affiliation:
University of Southern California Marshall School of Business [email protected]
Sungjune Pyun*
Affiliation:
Yonsei University School of Business
*
[email protected] (corresponding author)
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Abstract

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We consider a model in which the correlation between shocks to consumption and to expected future consumption growth is nonzero and varies over time. We validate this assumption empirically using the model’s implication that time variation in consumption growth persistence (CGP) drives the correlation between stock and bond returns. Our model implies that the stock–bond correlation is also related to the predictive relation between bond yields and future stock returns. Finally, we provide suggestive evidence that asset price fluctuations are the primary driver of changes in CGP.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 29
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Thierry Foucault (the editor), Allaudeen Hameed, Scott Joslin, Mete Kilic, Toomas Laarits (the referee), Lars Lochstoer, Miguel Palacios, Thomas Sargent, Johan Sulaeman, Selale Tuzel, participants at the 2021 Risk Management Conference, 2021 NFA Annual Meetings, Korea University, National University of Singapore, and University of Southern California. This research was supported by the Yonsei Business Research Institute and Yonsei University Research Fund 2023-22-0444. All errors are our own.

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