Smooth Transition Patterns in the Realized Stock Bond Correlation

Abstract

We analyze the realized stock-bond correlation. Gradual transitions between negative and positive stock-bond correlation is accommodated by the smooth transition regression (STR) model. The changes in regime are de…ned by economic and …nancial transition variables. Both in sample and out-ofsample results document that STR models with multiple transition variables outperform STR models with a single transition variable. The most important transition variables are the short rate, the yield spread, and the VIX volatility index.

Price discovery and regime shift behavior in the relationship between sharia stocks and sukuk: A two-state Markov switching analysis

“…They provide strong evidence of the flight-to-quality phenomenon. Quite similar findings are also provided by Aslanidis and Christiansen (2012). These authors explore the time-varying correlation between the U.S. stock and bond markets using the smooth transition regression and uncover the existence of two regimes which are systematically associated with the prevailing macroeconomic conditions.…”

Interdependence between the stock market and the bond market in one country: evidence from the subprime crisis and the European debt crisis

“…Aslanidisa and Christiansen (2012) proved the interdependence between the U.S. stock markets and bond markets by adopting the Markov-switching method proposed by Hamilton (Hamilton 1989). Furthermore, Chan et al (2011) analyzed the contagion between different financial markets, including stock markets, bond markets, commodity markets and real estate markets.…”

Macro-Finance Determinants of the Long-Run Stock-Bond Correlation: The DCC-MIDAS Specification

“…Ilmanen (2003), Guidolin and Timmermann (2006), and Aslanidis and Christiansen (2013) show that the general state of the macro economy provides information about the future stock-bond correlation. Aslanidis and Christiansen (2012) show that the short rate, the term spread, and the VXO volatility index are the most influential transition variables for determining the regime of the realized stock-bond correlation. Here we let prominent variables such as the industrial production growth, the unemployment rate, the default spread, the producer confidence index (PMI), the consumer confidence index (CC), and the National Activity Index (NAI) represent the state of the macro economy.…”