The Fed-model puzzle
Myron Gordon at the University of Toronto in 1982 For the last 13 years and until recently (see Bonds/Equity Positive Correlation: For How Long ?) correlation between US stock and bond returns have been negative. As presented by Hasseltoft (2009) , the correlation between US stock and bond returns has varied substantially over time (puzzle 1), reaching highly positive levels in the late 1970s and early 1980s while turning negative in the late 1990s. US strock and bond returns correlation Henrik Hasseltoft 2010 Several statistical models have been put forward to model the time variation but little work has been done on explaining the phenomenon within an equilibrium model. A second feature (puzzle 2) of data that has been considered puzzling is the highly positive correlation between US dividend yields and nominal interest rates , a relation often referred to as the Fed-model . From the Gordon (1962) growth formula, dividend yields are given by the real...