Conditional Co-Skewness in Stock and Bond Markets : Time Series Evidence

In the context of a three-moment Intertemporal Capital Asset Pricing Model specification, we characterize conditional co-skewness between stock and bond excess returns using a bivariate regime-switching model. We find that both conditional U.S. stock co-skewness (the relation between stock return and bond volatility) and bond co-skewness (the relation between bond return and stock volatility) command statistically and economically significant negative ex ante risk premiums. The impacts of the US stock and bond co-skewness on the conditional stock and bond premium on average is as large as the average of corresponding unconditional premium on these markets. The basic findings are quite robust in another country (U.K.) and in the recent post-WWII period