Trends in stock-bond correlations

Vol: 
03/2015
Author name: 
Harumi Ohmi, Tatsuyoshi Okimoto
Year: 
2015
Month: 
October
Abstract: 

Previous research 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 VIX 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 behavior that have taken place in recent years and after the Euro crisis.

Publication file: 

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