Campbell (1987) examines the relationship between stock returns and the term structure of interest rates. He finds that stock returns are influenced by the state of the term structure, with risk premia on stocks closely aligned with those on 20-year Treasury bonds, while risk premia on Treasury bills are somewhat independent. Average returns on 20-year bonds are lower than those on stocks. Campbell tests simple asset pricing models, including latent variable models where betas are constant and risk premia vary with expected returns on unobservable hedge portfolios. The data strongly reject a single-latent-variable model. He also examines the relationship between conditional means and variances of returns on bills, bonds, and stocks, finding that bill returns tend to be high when their conditional variance is high, but stock returns have a perverse negative relationship with their conditional variance. Campbell estimates a model where asset returns are determined by their time-varying betas with a fixed-weight "benchmark" portfolio of bills, bonds, and stocks, whose return is proportional to its conditional variance. This portfolio places almost all its weight on bills, indicating that uncertainty about nominal interest rates is important in pricing both short- and long-term assets. Campbell shows that variables used as proxies for risk premia on 20-year Treasury bonds also predict excess stock returns. He finds that the behavior of excess returns on 2-month Treasury bills is strikingly different, with highly predictable returns but weakly correlated risk premia with those of long-term assets. Despite their common movement, risk premia on bonds and stocks differ in some important respects. The estimated standard deviations of stock risk premia are considerably larger than those of bond risk premia, while the mean risk premia on these assets have opposite signs. In the 1959-78 period, mean excess returns on bonds were negative, while mean excess returns on stocks were highly positive. Updating to 1983, the means were -2.485%, 3.896%, and 0.378% respectively. Campbell tests asset pricing models using regression analyses of excess returns on 2-month bills, 20-year bonds, and stocks. The results show that the spread between 2- and 1-month bill rates has strong explanatory power for the excess return on 2-month bills over the month. The short rate and the lagged excess return on 2-month bills also have explanatory power for the full 1959-1983 sample. Campbell finds that the correlations between risk premia on bills, bonds, and stocks are positive, with bond and stock risk premia having an extremely high correlation. The estimated standard deviations of risk premia on bills, bonds, and stock are 0.231, 5.938, and 17.024 respectively. Campbell also tests latent variable models forCampbell (1987) examines the relationship between stock returns and the term structure of interest rates. He finds that stock returns are influenced by the state of the term structure, with risk premia on stocks closely aligned with those on 20-year Treasury bonds, while risk premia on Treasury bills are somewhat independent. Average returns on 20-year bonds are lower than those on stocks. Campbell tests simple asset pricing models, including latent variable models where betas are constant and risk premia vary with expected returns on unobservable hedge portfolios. The data strongly reject a single-latent-variable model. He also examines the relationship between conditional means and variances of returns on bills, bonds, and stocks, finding that bill returns tend to be high when their conditional variance is high, but stock returns have a perverse negative relationship with their conditional variance. Campbell estimates a model where asset returns are determined by their time-varying betas with a fixed-weight "benchmark" portfolio of bills, bonds, and stocks, whose return is proportional to its conditional variance. This portfolio places almost all its weight on bills, indicating that uncertainty about nominal interest rates is important in pricing both short- and long-term assets. Campbell shows that variables used as proxies for risk premia on 20-year Treasury bonds also predict excess stock returns. He finds that the behavior of excess returns on 2-month Treasury bills is strikingly different, with highly predictable returns but weakly correlated risk premia with those of long-term assets. Despite their common movement, risk premia on bonds and stocks differ in some important respects. The estimated standard deviations of stock risk premia are considerably larger than those of bond risk premia, while the mean risk premia on these assets have opposite signs. In the 1959-78 period, mean excess returns on bonds were negative, while mean excess returns on stocks were highly positive. Updating to 1983, the means were -2.485%, 3.896%, and 0.378% respectively. Campbell tests asset pricing models using regression analyses of excess returns on 2-month bills, 20-year bonds, and stocks. The results show that the spread between 2- and 1-month bill rates has strong explanatory power for the excess return on 2-month bills over the month. The short rate and the lagged excess return on 2-month bills also have explanatory power for the full 1959-1983 sample. Campbell finds that the correlations between risk premia on bills, bonds, and stocks are positive, with bond and stock risk premia having an extremely high correlation. The estimated standard deviations of risk premia on bills, bonds, and stock are 0.231, 5.938, and 17.024 respectively. Campbell also tests latent variable models for