Stock and bond market interactions with level and asymmetry dynamics: An out-of-sample application

Peter de Goeij and Wessel Marquering

Journal of Empirical Finance, 2009, vol. 16, issue 2, pages 318-329

Abstract: We model the dynamic interaction between stock and bond returns using a multivariate model with level effects and asymmetries in conditional volatility. We examine the out-of-sample performance using daily returns on the S&P 500 index and 10Â year Treasury bond. We find evidence for significant (cross-) asymmetries in the conditional volatility and level effects in bond returns. The out-of-sample covariance matrix forecasts of the model imply that an investor is willing to pay between 129 and 820 basis points per year for using a dynamic trading strategy instead of a passive strategy.

Keywords: Stock; and; bond; market; interaction; Time-varying; covariances; Asymmetric; volatility; Level; effect (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:empfin:v:16:y:2009:i:2:p:318-329

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Journal of Empirical Finance is edited by R. T. Baillie, G. Bekaert, W. Ferson, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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