A0189
Title: The real channel for nominal bond-stock puzzles
Authors: Dongho Song - Johns Hopkins University (United States) [presenting]
Mikhail Chernov - University of California Los Angeles (United States)
Lars Lochstoer - University of California Los Angeles (United States)
Abstract: Evidence is presented showing that the mix of transitory and permanent shocks to consumption is changing over time. We identify three regimes: two highly persistent regimes where either permanent or transitory shocks are relatively more dominant, and a largely transitory disaster regime. We study the implications of this finding for asset prices. The transition from the second to the first regime in the mid-1990s makes the correlation between equities and bonds switch signs from positive to negative, as in the data. The real bond and equity yield curves are approximately flat. The nominal bond curve is upward-sloping. These results are achieved without relying on the nominal channel too much. That is, as in the data, the variation of inflation in the model is under 40\% as a fraction of the variation in nominal yields.
