Inflation expectations and the stock-bond nexus in the US: hedging implications

Elham Kamal, Naji Jalkh and Elie Bouri

The European Journal of Finance, 2025, vol. 31, issue 6, 671-695

Abstract: This paper first examines the impact of inflation expectations on the correlation and tail-dependence between stock and Treasury (corporate) bond markets in the US and then assesses the portfolio and hedging implications. Using dynamic C-vine copula models, the results show in several cases a shift in the stock-bond nexus after conditioning on the levels of inflation expectations. The average dynamic tail-dependence between stocks and 10- and 30-year Treasury bonds becomes positive in the post-Covid era. High inflation expectations intensify the average tail-dependence between stocks and mid-term corporate bonds since the Covid-19 outbreak, and between stock and Treasury bonds from early 2020 to the beginning of the conflict between Russia and Ukraine. A hedging analysis shows that the hedging effectiveness improves after taking into account the impact of inflation expectations on stock-bond nexus, especially in the post-Covid-19 subperiod. This hedging effectiveness sustains after changing the proxy of inflation expectations.

Date: 2025
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DOI: 10.1080/1351847X.2024.2431503

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