COMMON RISK-FACTORS IN THE RETURNS ON STOCKS AND BONDS

This paper identifies five common risk factors in the returns on stock s and bonds. There are three stock-market factors: an overall market f actor and factors related to firm size and book-to-market equity. Ther e are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, a nd they are linked to bond returns through shared variation in the bon d-market factors. Except for low-grade corporates, the bond-market fac tors capture the common variation in bond returns. Most important, the five factors seem to explain average returns on stocks and bonds.