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Trends in Stock-Bond Correlations

Author

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  • OHMI Harumi
  • OKIMOTO Tatsuyoshi
Abstract
Previous studies document the existence of long-run trends in comovements in the stock and bond markets. Following these findings, this paper examines possible trends in stock-bond return correlations. To this end, we introduce a trend component into a smooth transition regression (STR) model including the multiple transition variables of Aslanidis and Christiansen (2012). The results indicate the existence of significant decreasing trends in stock-bond correlations for many advanced safer countries. In addition, although stock market volatility continues to be an important factor in stock-bond correlations, the short rate and yield spread become only marginally significant once we introduce the trend component. Our out-of-sample analysis also demonstrates that the STR model including the CBOE Volatility Index (VIX) and time trend as the transition variables dominates other models. Furthermore, we find a significant increase in stock-bond correlations for riskier Eurozone countries around the beginning of the Euro crisis. Our findings of decreasing and increasing trends in stock-bond correlations can be considered as a consequence of the decreasing effects of diversification and more intensive flight-to-quality behavior that have taken place in recent years and after the Euro crisis.

Suggested Citation

  • OHMI Harumi & OKIMOTO Tatsuyoshi, 2015. "Trends in Stock-Bond Correlations," Discussion papers 15115, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:15115
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    References listed on IDEAS

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    Cited by:

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    6. Refk Selmi & Christos Kollias & Stephanos Papadamou & Rangan Gupta, 2017. "A Copula-Based Quantile-on-Quantile Regression Approach to Modeling Dependence Structure between Stock and Bond Returns: Evidence from Historical Data of India, South Africa, UK and US," Working Papers 201747, University of Pretoria, Department of Economics.
    7. Jammazi, Rania & Ferrer, Román & Jareño, Francisco & Hammoudeh, Shawkat M., 2017. "Main driving factors of the interest rate-stock market Granger causality," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 260-280.
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    10. Okimoto, Tatsuyoshi & Takaoka, Sumiko, 2020. "No-arbitrage determinants of credit spread curves under the unconventional monetary policy regime in Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 64(C).

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