- Open Access
What news drive variation in Swiss and US bond and stock excess returns?
Swiss Journal of Economics and Statistics volume 150, pages 89–118 (2014)
Based on a vector autoregressive model (VAR), this paper shows that time variation in monthly excess returns on Swiss government bonds and stocks is predominantly driven by news of inflation and dividends, respectively. This finding is in marked contrast to US evidence which points to a more prominent role of excess return news. Variance decompositions based on estimates from threshold VARs show that US stock market evidence is consistent with the view that market participants put more weight on news of macroeconomic, i.e. cash-flow, risks in periods of exceptionally low real interest rates than in normal times.
Campbell, John Y. (1991), “A Variance Decomposition for Stock Returns”, Economic Journal, 101, pp. 157–179.
Campbell, John Y., and John Ammer (1993), “What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns”, Journal of Finance, 48, pp. 3–37.
Campbell, John Y., and John H. Cochrane (1999), “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behaviour”, Journal of Political Economy, 107, pp. 205–251.
Campbell, John Y., Stefano Giglio and Christopher Polk (2013), “Hard Times”, Review of Asset Pricing Studies, 3, pp. 95–132.
Campbell, John Y., and Robert J. Shiller (1988), “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors”, Review of Financial Studies, 1, pp. 195–228.
Chen, Long (2009), “On the Reversal of Dividend and Return Predictability: A Tale of Two Periods”, Journal of Financial Economics, 92, pp. 128–151.
Chen, Long, and Xinlei Zhao (2009), “Return Decomposition”, Review of Financial Studies, 22, pp. 5213–5249.
Cochrane, John H. (2008), “The Dog That Did Not Bark: A Defense of Return Predictability”, Review of Financial Studies, 21, pp. 1533–1575.
Cochrane, John H. (2011), “Presidential Address: Discount Rates”, Journal of Finance, 66, pp. 1046–1108.
De Long, J. Bradford, and Marco Becht (1992), “‘Excess’ Volatility and the German Stock Market: 1876–1990”, NBER working paper 4054.
Engsted, Tom, Thomas Q. Pedersen and Carsten Tanggaard (2012), Pitfalls in VAR Based Return Decompositions: A Clarification”, Journal of Banking and Finance, 36, pp. 1255–1265.
Engsted, Tom, and Thomas Q. Pedersen (2010), “The Dividend-Price Ratio Does Predict Dividend Growth: International Evidence”, Journal of Empirical Finance, 17, pp. 585–605.
Engsted, Tom, and Carsten Tanggaard (2001), “The Danish Stock and Bond Markets: Comovement, Return Predictability and Variance Decomposition”, Journal of Empirical Finance, 8, pp. 243–271.
Galsband, Victoria, and Thomas Nitschka (2013), “Foreign Currency Returns and Systematic Risks”, forthcoming Journal of Financial and Quantitative Analysis.
Grisse, Christian, and Thomas Nitschka (2013), “On Financial Risk and the Safe Haven Characteristics of Swiss Franc Exchange Rates”, SNB Working Paper 2013-04.
Habib, Maurizio M., and Livio Stracca (2012), “Getting Beyond Carry Trade. What Makes a Safe Haven Currency?”, Journal of International Economics, 87, pp. 50–64.
Hoffmann, Mathias, and Rahel Suter (2010), “The Swiss Franc Exchange Rate and Deviations From Uncovered Interest Rate Parity: Global vs Domestic Factors”, Swiss Journal of Economics and Statistics, 146, pp. 349–371.
Kocherlakota, Narayana (2013), “Low Real Interest Rates”, Speech given at the 22nd Annual Hyman P. Minsky Conference, Levy Economics Institute of Bard College, New York on April 18, 2013. Federal Reserve Bank of Minneapolis.
Kugler, Peter, and Beatrice Weder (2005), “Why Are Returns on Swiss Franc Assets so Low?”, Applied Economics Quarterly, 51, pp. 231–246.
Ranaldo, Angelo, and Paul Söderlind (2010), “Safe Haven Currencies”, Review of Finance, 14, pp. 385–407.
Rangvid, Jesper, Maik Schmeling and Andreas Schrimpf (2013), “Dividend Predictability around the World”, Forthcoming Journal of Financial and Quantitative Analysis.
Rey, David (2004), “A Variance Decomposition for Swiss Stock Market Returns”, University of Basel, WWZ/Department of Finance, Working Paper No. 7/04.
Shiller, Robert J., and Andrea E. Beltratti (1992), “Stock Prices and Bond Yields. Can their Comovements be Explained in Terms of Present Vale Models?”, Journal of Monetary Economics, 30, pp. 25–46.
Swiss National Bank, Quarterly Bulletin 2/2013 June.
Van Binsbergen, Jules H., and Ralph S.J. Koijen (2010), “Predictive Regressions: A Present-Value Approach”, Journal of Finance, 65, pp. 1439–1471.
Viceira, Luis M. (2008), “Bond Risk, Bond Return Volatility, and the Term Structure of Interest Rates”, International Journal of Forecasting, 28, pp. 97–117.
I would like to thank an anonymous referee of this journal, Katrin Assenmacher, Alain Gabler, Pierre Monnin, an anonymous referee of the Swiss National Bank Working Paper Series as well as participants in the SNB Brown Bag seminar for helpful comments and suggestions. An earlier version of this paper circulated under the title “The Good? The Bad? The Ugly? Which news drive (co)variation in Swiss and US bond and stock excess returns?” published as SNB working paper 2014-1. The views expressed in this paper are those of the author and not necessarily representative of the views of the Swiss National Bank. Any errors and omissions are my own.
About this article
Cite this article
Nitschka, T. What news drive variation in Swiss and US bond and stock excess returns?. Swiss J Economics Statistics 150, 89–118 (2014). https://doi.org/10.1007/BF03399403
- bond return
- news components
- stock return
- variance decomposition