Extreme Correlation of Stock and Bond Futures Markets: International Evidence
Working paper, July 2011
45 Pages Posted: 2 Sep 2011 Last revised: 26 Sep 2011
Date Written: September 1, 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.
Keywords: stock-bond extreme correlation, futures, copula, macroeconomic news, stock market uncertainty
JEL Classification: G12, G15, E44
Suggested Citation: Suggested Citation