Characterizing the Co-Movement of the Stock and Bond Markets

44 Pages Posted: 3 Mar 2008 Last revised: 25 Nov 2008

See all articles by Chunhua Lan

Chunhua Lan

University of New Brunswick - Fredericton; Financial Research Network (FIRN)

Date Written: February 2008

Abstract

This paper documents a negative relation between the volatility of the U.S. stock market and the covariance of the U.S. stock and bond markets when the stock market is highly volatile. Cash-flow effect, compared with risk-premium effect, contributes substantially to this relation. During a volatile period, a decrease in expected future dividend growth rates induces a considerable decline in the covariance and a significant increase in stock market uncertainty. However, this negative relation has been pronounced only in the last two decades, not in the 1960s and 1970s. The fact that the inflation rate is high and volatile during the first subperiod but stays low and stable in the second subperiod causes this different relation.

Keywords: time-varying covariance, stock market, bond market

JEL Classification: G10

Suggested Citation

Lan, Chunhua, Characterizing the Co-Movement of the Stock and Bond Markets (February 2008). Available at SSRN: https://ssrn.com/abstract=1100974 or http://dx.doi.org/10.2139/ssrn.1100974

Chunhua Lan (Contact Author)

University of New Brunswick - Fredericton ( email )

Bailey Drive
P.O. Box 4400
Fredericton NB E3B 5A3
Canada

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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