The Joint Dynamics of Stock and Bond Risk‐Returns in Japan

Abstract

We examine the joint dynamics of stocks and bonds in the Japanese market by computing the prices of risks and their relationship in stock and bond factors. We deconstruct market factors into industry factors and incorporate bond factors such as the level, slope, and curvature of yield curves. This paper contributes to the literature by identifying the risk-return relationship in Japanese financial market and explaining the cross-sectional variations of stock returns in consideration of the bond market, and illustrating the importance of macro information in stock returns. Our approach and results provide practical implications to hedge fund managers, mutual fund managers, and basket traders.