Nonlinear and extreme dependence between long-term sovereign bond yields and the stock market: A quantile-on-quantile analysis

Román Ferrer (), Syed Jawad Hussain Shahzad and Adrián Maizonada ()
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Román Ferrer: Department of Actuarial and Financial Economics, University of Valencia, Spain
Adrián Maizonada: Department of Actuarial and Financial Economics, University of Valencia, Spain

Economics Bulletin, 2019, vol. 39, issue 2, 969-981

Abstract: This paper explores the links between yields on long-term bonds and stock market returns using the novel quantile-on-quantile (QQ) method. This approach quantifies the effect that the quantiles of bonds yield have on the quantiles of stock returns, thus offering a suitable framework for capturing the entire dependence structure. The empirical results illustrate that the interest rate-equity market nexus is principally positive. In fact, the most pronounced relationship is detected under extreme circumstances in both stock and sovereign bond markets, mainly in an environment characterized by sharp declines in yields on 10-year Treasury bonds and a markedly bearish environment in stock prices. The findings of this study have significant implications for practitioners in making adequate asset allocation and hedging decisions and also help policy makers to preserve financial stability, particularly in times of heightened uncertainty and financial crisis.

Keywords: interest rates; stock market; bearish market; quantile-on-quantile approach; quantile regression (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 2019-04-27
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Citations: View citations in EconPapers (5)

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