Submission Title

Co-Integration of Equity and Bond Returns

Location

Jereld R. Nicholson Library

Subject Area

Economics

Description

Since the early 1970s, equity returns and 10-year Treasury bond returns have exhibited similar time series behavior. This study examines the relationship between these assets by testing for co-integration between equity returns, treasury returns, and corporate leverage as a measure of risk. The study finds that equity returns, treasury returns, and corporate leverage are not co-integrated and, thus, a long run equilibrium relationship between the asset returns and risk does not exist. Results indicate that treasury returns do not help forecast equity returns over the long run.

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Co-Integration of Equity and Bond Returns

Jereld R. Nicholson Library

Since the early 1970s, equity returns and 10-year Treasury bond returns have exhibited similar time series behavior. This study examines the relationship between these assets by testing for co-integration between equity returns, treasury returns, and corporate leverage as a measure of risk. The study finds that equity returns, treasury returns, and corporate leverage are not co-integrated and, thus, a long run equilibrium relationship between the asset returns and risk does not exist. Results indicate that treasury returns do not help forecast equity returns over the long run.