Stock vs. Bond Yields and Demographic Fluctuations

Arie Gozluklu, Annaïg Morin

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Abstrakt

This paper analyzes the strong comovement between real stock and nominal bond yields at generational frequencies. Using a stochastic overlapping generations model with cash-in-advance constraints, we show that the simulated life-cycle patterns in savings behavior make both real stock and nominal bond yields comove with the changing population age structure. These persistent comovements account for the equilibrium relation between stock and bond markets. A stochastic Fisher decomposition of nominal bond yields reveals that, while having a moderate effect on both the inflation risk premium and expected inflation, demographic changes affect nominal yields mainly through real bond yields. Using both U.S. data and a cross-country panel, we find empirical support for these theoretical predictions. Finally, we show that the strength of the demographic effect on real yields explains cross-country differences in the comovement between stock and bond markets, while alternative demographic channels fail to explain such cross-country heterogeneity.
OriginalsprogEngelsk
Artikelnummer105683
TidsskriftJournal of Banking & Finance
Vol/bind109
Antal sider25
ISSN0378-4266
DOI
StatusUdgivet - dec. 2019

Emneord

  • Demographics
  • Financial yields
  • OLG
  • Inflation risk premium

Citationsformater