Trends in stock-bond correlations

Harumi Ohmi, Tatsuyoshi Okimoto

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)

Abstract

Previous studies document the existence of long-run trends in comovements in the stock and bond markets. Following these findings, this article 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 volatility index and time trend as the transition variables, dominates other models. Furthermore, we find a significant increase in stock-bond correlations for riskier euro countries around the beginning of the euro crisis. Our findings of decreasing and increasing trends in stock-bond correlations can be considered a consequence of the decreasing effects of diversification and more intensive flight-to-quality behaviour that have taken place in recent years and after the euro crisis.

Original languageEnglish
Pages (from-to)536-552
Number of pages17
JournalApplied Economics
Volume48
Issue number6
DOIs
Publication statusPublished - 2016 Feb 1
Externally publishedYes

Keywords

  • Comovement
  • diversification effect
  • flight-to-quality
  • smooth transition

ASJC Scopus subject areas

  • Economics and Econometrics

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