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What news drive variation in Swiss and US bond and stock excess returns?

Summary

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.

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Correspondence to Thomas Nitschka.

Additional information

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.

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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

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JEL-Classification

  • E44
  • G12

Keywords

  • bond return
  • news components
  • stock return
  • variance decomposition