Extreme risk spillovers between stock and bond markets

Cathy Ning and Jeremey Ponrajah ()

No 90, Working Papers from Toronto Metropolitan University, Department of Economics

Abstract: This paper investigates downside and upside risk spillovers between bond and stock markets. We employ a dependence-switching copula model that allows for both positive and negative dependence, as well as transitions between them, to examine the stock-bond dependence. We estimate the downside and upside Value-at-Risk (VaR) and Conditional Value-at-Risk (Co-VaR) to examine risk spillovers between the two markets. Using weekly data from the USA, Canada, France, and Germany, we find evidence of risk spillovers from stock to bond markets and vice versa, and the risk spillover from the bond to the stock market is more significant than the reverse direction. Additionally, we find that the downside risk spillovers are greater than the upside risk spillovers, indicating asymmetry. Our findings enrich the literature and have important implications for risk management and investment strategies, as well as financial stability and monetary policy decisions.

Pages: 31 pages
Date: 2024-01
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