Macroeconomics determinants of the correlation between stocks and bonds
Marcello Pericoli ()
No 1198, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area
We analyze the correlation between the stock and bond markets in Germany and the US. We use a standard no-arbitrage affine model to decompose the correlation between these two assets into its main drivers. The correlation between bond yields and stock returns is a key determinant of asset allocation. Our results show that the correlation is primarily influenced by the uncertainty about inflation and real interest rates as well as by co-movement between inflation, real interest rates and dividend growth. Shocks to inflation, real interest rates and dividend growth can explain the correlation’s temporary deviation from its long-term dynamics.
Keywords: bond market; stock market; macroeconomic shocks; money illusion (search for similar items in EconPapers)
JEL-codes: C32 E43 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1198_18
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