The Dynamic Correlation between Stock and Bond Returns: Evidence from the U.S. Market

43 Pages Posted: 22 Mar 2009

See all articles by Thomas Chinan Chiang

Thomas Chinan Chiang

Drexel University - Department of Finance

Jiandong Li

Central University of Finance and Economics

Date Written: March 17, 2009

Abstract

This paper investigates the correlation of returns between the U.S. stock and bond markets using two prominent index funds. By employing both rolling correlation and dynamic correlation coefficient models for the sample period from 1996 through 2008, we find that the correlation coefficients between stocks and bonds are time-varying and, on average, negative. The correlation coefficients between stock and bond markets depend on a few key macro state variables. The correlation coefficient is negatively correlated with the uncertainty of the stock market's performance but positively related to real income growth and the level of the federal funds rate.

Keywords: Stock-bond correlation,Volatility, DCC model, Fed model, Credit spread

JEL Classification: C12, C13, G10, G11

Suggested Citation

Chiang, Thomas C. and Li, Jiandong, The Dynamic Correlation between Stock and Bond Returns: Evidence from the U.S. Market (March 17, 2009). Available at SSRN: https://ssrn.com/abstract=1362225 or http://dx.doi.org/10.2139/ssrn.1362225

Thomas C. Chiang

Drexel University - Department of Finance ( email )

32nd & Chestnut Streets
Philadelphia, PA 19104
United States
215-895-1745 (Phone)

Jiandong Li (Contact Author)

Central University of Finance and Economics ( email )

Beijing, Beijing
China
62288469 (Phone)

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