Dynamic stock–bond return correlations and financial market uncertainty

Dynamic stock–bond return correlations and financial market uncertainty This paper investigates the dynamic correlations of stock–bond returns for six advanced markets. Statistics suggest that stock–bond relations are time-varying and display smooth transitional changes. The stock–bond correlations are negatively correlated with stock market uncertainty as measured by the conditional variance and the implied volatility of the S&P 500 index. However, stock–bond relations are positively related to bond market uncertainty as measured by the conditional variance of bond returns. The evidence also shows that stock–bond correlations are significantly influenced by default risk and the London interbank offered rate–T-bill rate spread in the crisis period. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Dynamic stock–bond return correlations and financial market uncertainty

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Publisher
Springer Journals
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0430-4
Publisher site
See Article on Publisher Site

Abstract

This paper investigates the dynamic correlations of stock–bond returns for six advanced markets. Statistics suggest that stock–bond relations are time-varying and display smooth transitional changes. The stock–bond correlations are negatively correlated with stock market uncertainty as measured by the conditional variance and the implied volatility of the S&P 500 index. However, stock–bond relations are positively related to bond market uncertainty as measured by the conditional variance of bond returns. The evidence also shows that stock–bond correlations are significantly influenced by default risk and the London interbank offered rate–T-bill rate spread in the crisis period.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 8, 2014

References

  • Stock return predictability and model uncertainty
    Avramov, D
  • The determinants of stock and bond return comovements
    Baele, L; Bekaert, G; Koen, I
  • Market liquidity and funding liquidity
    Brunnermeier, MK; Pedersen, LH
  • What moves the stock and bond markets? A variance decomposition for long-term asset returns
    Campbell, JY; Ammer, J
  • In search of distress risk
    Campbell, JY; Hilscher, J; Szilagyi, J
  • Asymmetric dynamics in the correlations of global equity and bond returns
    Cappiello, L; Engle, RF; Sheppard, K
  • Forecasting time-varying covariance with a range-based dynamic conditional correlation model
    Chou, R; Wu, C; Liu, N
  • Predicting stock market volatility: a new measure
    Fleming, J; Ostdiek, B; Whaley, R
  • Debt and equity market reaction to employment reports
    Ghosh, A; Clayton, R

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