The Contagion of International Crises: Implications of Inflation and Investor Sentiment on Stock and Treasury bond Returns

Abstract

In recent years, the stock market has faced numerous challenges generated by unexpected events that had a major impact on the global economy. Thus, through this paper, which is based on the analysis of the relationships between inflation, stock market yields and treasury bond yields in the context of international crises, it is intended to illustrate the possible effects of inflation on stock market yields and treasury bonds, as well as to compare the performance of stock market indices and treasury bonds in relation to the corresponding inflation. The main objective of this paper was to capture the complex relationships between inflation, stock market index returns and treasury bond yields over a period of ten years by using a series of advanced statistical techniques. Through the advanced techniques and models implemented, it is proposed to evaluate the correlation and causality between these economic variables, the goal being to determine the degree of influence these correlations have on the investor's sentiment in choosing the investment portfolio. The originality of this paper is reflected by the case study carried out on the daily returns of stock indices from America and Central-Eastern Europe, as well as the variable values of the consumer price index and long-maturity treasury bonds, over a period marked by events with a high impact on the global economy. The results obtained show that in the analyzed time series there is a close connection between the contagion of stock markets, inflation and 10-year treasury bonds, and the strong impact tends to be unidirectional, from the changes recorded in the level of inflation to stock index returns and 10-year treasury bond yields, as a result of the evolution of the geopolitical conflict and of the state of the global and regional economies, but not vice versa.