Dynamic stock-bond model reveals rich insights into market risk and returns.
The article explores how stock and bond prices can help predict future returns. By using a special model, researchers can directly observe expected returns and prices of risk. This model considers both bond and stock markets together, giving more accurate estimates. When applied to U.S. data, the model shows that prices of risk and expected returns change over time, sometimes following economic cycles. The study also suggests that future returns can be predicted to some extent.