Stock-Bond Correlations

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

“…The other important macro-finance variables for explaining the long-run stock volatility (NAI) and bond volatility (term spread) and VXO are not significant for the long-run stock-bond correlation. The forecasting ability of the inflation is consistent with Ilmanen (2003) who finds that changes in discount rates dominate the cash flow expectations during periods of high inflation, thereby inducing a positive stock-bond correlation. This is, however, in contrast with Campbell and Ammer (1993) who report that variations in expected inflation promote a negative correlation since an increase in inflation is bad news for bonds and ambiguous news for stocks.…”

“…Therefore, as in Baele et al (2010), we include the trading volume of S&P500 future contracts as the liquidity-related variable in the paper. 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.…”

Modeling tick-by-tick realized correlations

“…Figure 1 shows the autocorrelogram of the empirical stock-bond correlations of our real data application of Section 3 matches well the one for correlations obtained simulating data from the HAR model with parameters similar to those estimated from real data. literature on stock-bond correlations already report that stock-bond correlations went from positive to negative after 1997 (see, for example, Ilmanen, 2003). The reasons given to explain this pattern vary.…”

“…The reasons given to explain this pattern vary. One relates to market uncertainty and risk, introducing the "flight-to-quality" effect, which suggests the phenomenon of fleeing from stock to bond markets in times of worsening economic conditions (see for example, Ilmanen, 2003;or Connolly et al, 2005). Another explanation for the change of sign in stock-bond correlations relates to differences in inflation expectations or in the expectations of other macroeconomic variables (see for example, Li, 2002;or Christiansen and Ranaldo, 2007).…”

“…Among these, Cappiello et al (2006) provided statistical evidence of a structural break in stock-bond correlations due to the introduction of the Euro. Li (2002), Ilmanen (2003) and Christiansen and Ranaldo (2007) report that US stock-bond correlations went from positive to negative after 1997. Guidolin and Timmermann (2006) found empirical evidence that a four-state Markov regime-switching model is needed to capture the joint dynamics of US stock and bond returns.…”