ON THE RELATIONSHIP BETWEEN THE DANISH STOCK AND BOND MARKET IN THE MEDIUM AND LONG TERM

This short paper studies the empirical relationship between realized stock returns and bond <p> yields at the 5- and 10-year investment horizons, respectively. Using annual Danish data since <p> 1927, we find that stock returns and bond yields are closely linked in the medium and long <p> term, as we estimate strong cointegrating relations at both horizons. Hence, at the 5- and 10- <p> year investment horizons a high bond yield tends to go hand in hand with a high stock return, <p> and vice versa. Results show that stock returns tend to respond less than one-to-one to <p> changes in the bond yield.