The stock–bond comovements and cross-market trading

Mengling Li, Huanhuan Zheng, Terence Tai Leung Chong and Yang Zhang

Journal of Economic Dynamics and Control, 2016, vol. 73, issue C, 417-438

Abstract: We propose an asset pricing model with heterogeneous agents allocating capital to the stock and bond markets to optimize their portfolios, utilizing the dynamic interaction between the two markets. While some agents focus on the stock market and have more expertise in it, the others specialize in the bond market. Based on their comparative advantages in a particular market, heterogeneous agents constantly revise their investment portfolios by taking into account the time-varying stock–bond return comovements and the changing market conditions. Agents׳ collective investment behavior shapes the stock–bond interlinkage, which feedbacks on their subsequent capital allocations. Using monthly US stock and bond data from January 1990 to June 2014, we estimate the vector autoregression model with threshold and Markov switching mechanisms. We find evidence in support of flight-to-quality and show that it is mainly driven by the technical traders who actively sell stocks and buy bonds during periods of high market uncertainty.

Keywords: Heterogeneity; Stock–bond comovement; Markov switching VAR; Threshold VAR (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: The Stock-Bond Comovements and Cross-Market Trading (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:73:y:2016:i:c:p:417-438

DOI: 10.1016/j.jedc.2016.10.007

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