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

See all articles by Nektarios Aslanidis

Nektarios Aslanidis

Universitat Rovira Virgili

Charlotte Christiansen

Aarhus University - CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: April 27, 2010

Abstract

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

Aslanidis, Nektarios and Christiansen, Charlotte, Smooth Transition Patterns in the Realized Stock Bond Correlation (April 27, 2010). CREATES Research Paper 2010-15, Available at SSRN: https://ssrn.com/abstract=1596592 or http://dx.doi.org/10.2139/ssrn.1596592

Nektarios Aslanidis (Contact Author)

Universitat Rovira Virgili ( email )

Tarragona
Spain

Charlotte Christiansen

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

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