The Stock--Bond Covariance Puzzle

Tobias Adrian and Andres Schneider

No 22151, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The stock--bond covariance changes sign over time for two reasons: the relative importance of stock and bond shocks changes, and the degree to which shocks affect the two markets changes. Differential time-varying volatility of stocks and bonds allows identification of these two mechanisms. The equity-dominant shock has a comparatively stable response direction throughout 1990--2026, but the response of stocks to bond shocks switches sign---positive before 2002, near zero or negative in 2002--2019, and positive after 2020. Theories that match the stock--bond covariance therefore must also match how their shocks impact stock and bond returns.

Keywords: stock-bond correlation; Macro-finance; Asset allocation (search for similar items in EconPapers)
JEL-codes: C22 G10 G11 G12 (search for similar items in EconPapers)
Date: 2026-11
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