The Stock-Bond Correlation and Macroeconomic Conditions: One and a Half Centuries of Evidence

36 Pages Posted: 22 Dec 2008

See all articles by Jian Yang

Jian Yang

University of Colorado at Denver - Business School

Yinggang Zhou

Xiamen University - Department of Finance

Zijun Wang

Texas A&M University

Date Written: November 22, 2008

Abstract

Using monthly stock and bond return data in the past 150 years (1855-2001) for both the U.S. and the U.K., this study documents time-varying stock-bond correlation over macroeconomic conditions (the business cycle, the inflation environment and monetary policy stance). There are different patterns of time variation in stock-bond correlations over the business cycle between U.S. and U.K., which implies that bonds may be a better hedge against stock market risk and offer more diversification benefits to stock investors in the US than in the UK. Further, there is a general pattern across both the U.S. and the U.K. during the post-1923 subperiod and during the whole sample period: higher stock-bond correlations tend to follow higher short rates and (to a lesser extent) higher inflation rates.

Keywords: Stock-bond correlation, Business cycle, Asymmetry, Smooth transition, GARCH

JEL Classification: G12, G15, E44

Suggested Citation

Yang, Jian and Zhou, Yinggang and Wang, Zijun, The Stock-Bond Correlation and Macroeconomic Conditions: One and a Half Centuries of Evidence (November 22, 2008). Available at SSRN: https://ssrn.com/abstract=1318764 or http://dx.doi.org/10.2139/ssrn.1318764

Jian Yang (Contact Author)

University of Colorado at Denver - Business School ( email )

1250 14th St.
Denver, CO 80204
United States

Yinggang Zhou

Xiamen University - Department of Finance ( email )

Xiamen, Fujian 361005
China

Zijun Wang

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

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