 Trends in Stock-Bond CorrelationsHarumi Ohmi and Tatsuyoshi Okimoto Discussion papers from Research Institute of Economy, Trade and Industry (RIETI) Abstract: Previous studies 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 CBOE Volatility Index (VIX) and time trend as the transition variables dominates other models. Furthermore, we find a significant increase in stock-bond correlations for riskier Eurozone countries around the beginning of the Euro crisis. Our findings of decreasing and increasing trends in stock-bond correlations can be considered as 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. Pages: 31 pages Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:15115 Access Statistics for this paper More papers in Discussion papers from Research Institute of Economy, Trade and Industry (RIETI) Contact information at EDIRC. |
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