Pricing equity-bond covariance risk: Between flight-to-quality and fear-of-missing-out

摘要: Abstract Motivated by Merton (1973), we propose a novel bivariate intertemporal asset pricing model, which relates expected equity and bond market returns to their conditional covariance. Investors’ dynamic hedging demand coincides with covariance risk, in turn plays central role explaining contemporaneous time-variation returns. Our model predictions are consistent variations that include flight-to-quality fear-of-missing-out episodes, both of coincide low levels equity-bond We identify determinants thus potential drivers fear-of-missing-out. Unanticipated changes inflation, illiquidity stock uncertainty predict the covariance, where contribution each variable is state-dependent. In particular, non-linear effects shocks inflation act as key driver.