Asymmetric dynamics in the correlations of global equity and bond returns

Kevin Sheppard (), Robert F. Engle and Lorenzo Cappiello

No 204, Working Paper Series from European Central Bank

Abstract: This paper investigates the presence of asymmetric conditional second moments in international equity and bond returns. The analysis is carried out through an asymmetric version of the Dynamic Conditional Correlation model of Engle (2002). Widespread evidence is found that national equity index return series show strong asymmetries in conditional volatility, while little evidence is seen that bond index returns exhibit this behaviour. However, both bonds and equities exhibit asymmetry in conditional correlation. Worldwide linkages in the dynamics of volatility and correlation are examined. It is also found that beginning in January 1999, with the introduction of the Euro, there is significant evidence of a structural break in correlation, although not in volatility. The introduction of a fixed exchange rate regime leads to near perfect correlation among bond returns within EMU countries. However, equity return correlation both within and outside the EMU also increases after January 1999. JEL Classification: F3; G1; C5.

Keywords: International finance; correlation; variance targeting; multivariate GARCH; international stock and bond correlation. (search for similar items in EconPapers)
Date: 2003-01
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Related works:
Journal Article: Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns (2006)
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