Market fragility and the paradox of the recent stock-bond dissonance

  • After the Lehman-Brothers collapse, the stock index has exceeded its pre-Lehman-Brothers peak by 36% in real terms. Seemingly, markets have been demanding more stocks instead of bonds. Yet, instead of observing higher bond rates, paradoxically, bond rates have been persistently negative after the Lehman-Brothers collapse. To explain this paradox, we suggest that, in the post-Lehman-Brothers period, investors changed their perceptions on disasters, thinking that disasters occur once every 30 years on average, instead of disasters occurring once every 60 years. In our asset-pricing calibration exercise, this rise in perceived market fragility alone can explain the drop in both bond rates and price-dividend ratios observed after the Lehman-Brothers collapse, which indicates that markets mostly demanded bonds instead of stocks.

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Metadaten
Author:Christos Koulovatianos, Jian Li, Fabienne Weber
URN:urn:nbn:de:hebis:30:3-437394
URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3084155
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 589
Series (Serial Number):CFS working paper series (589)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2017
Year of first Publication:2017
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2017/12/12
Tag:asset pricing; bond returns; disaster risk; price-dividend ratio
Issue:November 7, 2017
Page Number:38
HeBIS-PPN:424516446
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht