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The implicit assumption of linearity is an important element in empirical finance. This paper presents a hypothesis testing approach which examines the linear behavior of the conditional mean between stock and bond returns. Conventional tests detect spurious non-linearity in the conditional mean caused by heteroskedasticity and/or autocorrelation. This paper re-states these tests in a heteroskedasticity and autocorrelation consistent (HAC) framework and authors find that stock and bond returns are indeed linear-in-the-mean in both univariate and bivariate settings.
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