Smooth Transition Patterns in the Realized Stock Bond Correlation
CREATES Research Paper 2010-15
29 Pages Posted: 27 Apr 2010 Last revised: 16 Apr 2012
Date Written: April 27, 2010
This paper explores the time variation in the stock-bond correlation using high-frequency data. Gradual transitions between regimes of negative and positive stock-bond correlation are well accommodated by the smooth transition regression (STR) model. We find that the regimes are systematically related to movements in financial and to a minor extend macroeconomic transition variables. In particular, the most informative transition variables are the short rate, the yield spread, and the VIX volatility index. Importantly, both in-sample and out-of-sample evaluation criteria show that multiple transition variable STR specifications considerably outperform single transition variable STR models. Our results are robust to different forecast horizons.
Keywords: realized stock-bond correlation, smooth transition regressions, correlation regimes, VIX index
JEL Classification: C22, G11, G12, G17
Suggested Citation: Suggested Citation