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The Co-Movement Puzzle

This paper shows that the discount rates on three major risky asset classes – equity, housing and corporate bonds – do not co-move. Using new long-run data for 17 advanced economies, I show that asset-specific discount rates are uncorrelated, and that asset valuations and macro-financial risk factors predict returns on individual asset classes, but not across asset classes. This lack of co-movement presents a new asset pricing puzzle with important implications. Most theories in macro-finance assume a joint pricing kernel and attribute excess volatility across all asset classes to time variation in this common discount factor. My findings show that most excess volatility is, in fact, asset-specific and is therefore not driven by cross-asset risk factors such as risk aversion, long-run risk, disaster risk and intermediary risk appetite.