An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns

Massimo Guidolin () and Allan Timmerman

No 2005-003, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper considers a variety of econometric models for the joint distribution of US stock and bond returns in the presence of regime switching dynamics. While simple two- or three-state models capture the univariate dynamics in bond and stock returns, a more complicated four state model with regimes characterized as crash, slow growth, bull and recovery states is required to capture their joint distribution. The transition probability matrix of this model has a very particular form. Exits from the crash state are almost always to the recovery state and occur with close to 50 percent chance suggesting a bounce-back effect from the crash to the recovery state.

Keywords: Time-series analysis; Stocks; Bond market (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-fin
Date: 2005
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Published in Journal of Applied Econometrics, January 2006, 21(1), pp. 1-22

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Journal Article: An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns (2006)
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