STOCKâ€ BOND COâ€ MOVEMENTS AND FLIGHTâ€ TOâ€ QUALITY IN G7 COUNTRIES: A TIMEâ€ FREQUENCY ANALYSIS
Sercan Demiralay and
Hatice Gaye Gencer
Bulletin of Economic Research, 2018, vol. 70, issue 1, E29-E49
This paper examines coâ€ movement between stock returns and changes in 10â€ year government bond yields as well as flightâ€ toâ€ quality behaviour in G7 countries. We conduct the wavelet squared coherence analysis to explore the dynamics in both time and frequency domain. Our results provide evidence of positive coâ€ movements, which vary over time and across investment horizon. The higher coâ€ movement is found to be more concentrated in the lower frequency bands. We further analyse the dynamic nature of the scaleâ€ dependent wavelet correlations and find that the correlations are highly volatile and significantly increase across different time scales during the episodes of equity market turbulence. The increase in correlations reflects flights from stocks to safer bond investments as a result of dramatic changes in investor sentiment and risk aversion at times of market stress.
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