Extreme Correlation of Stock and Bond Futures Markets: International Evidence
Chin Man Chui
Xiamen University - Institute for Financial and Accounting Studies
University of Colorado at Denver - Business School
September 1, 2011
Working paper, July 2011
Using daily stock and bond futures data of three developed markets (the U.S., the UK and Germany), this study explores time-varying extreme correlation of stock-bond futures markets. There is evidence of positive extreme correlation between stock and bond futures markets in the U.S. and the UK when both markets are extremely bullish or bearish. By contrast, German stock-bond futures extreme correlation is negative, which suggests most diversification potentials of German bond futures market when German stock index futures market plunges. Macroeconomic news, the business cycle and the stock market uncertainty all significantly affect the median stock-bond futures correlation. By contrast, only the stock market uncertainty (perhaps as a measure of investor sentiment) still significantly affects the extreme stock-bond futures correlation, when the stock market is extremely bearish.
Number of Pages in PDF File: 45
Keywords: stock-bond extreme correlation, futures, copula, macroeconomic news, stock market uncertainty
JEL Classification: G12, G15, E44working papers series
Date posted: September 2, 2011 ; Last revised: September 26, 2011
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