Global Risk Aversion and International Return Comovements

Download or read book Global Risk Aversion and International Return Comovements written by Nancy R. Xu and published by . This book was released on 2019 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: I establish three stylized facts about global equity and bond return comovements: Equity return correlations are higher, asymmetric, and countercyclical, whereas bond return correlations are lower, symmetric, and weakly procyclical. To interpret these stylized facts, I formulate a dynamic no-arbitrage asset pricing model that consistently prices international equities and bonds; the model features various time-varying global macroeconomic uncertainties and risk aversion of a global investor. I find that different sensitivities of equity returns (strongly negative) and bond returns (weakly positive or negative) to the global risk aversion shock can explain the observed comovement differences. Global risk aversion explains 90% (40%) of the fitted global equity (bond) comovement dynamics.