Stocks and Bonds: Eggs in the Same or Different Baskets - A Cointegration Analysis

17 Pages Posted: 25 May 2013

Date Written: August 24, 2002

Abstract

The Johansen cointegration testing and estimation procedure is applied to examine the relationships among the stock markets, government bond markets and credit bond markets of the US, UK, Europe and Japan over the period 1985M1:2002M4. Asset class relationships are examined with returns denominated in dollars, sterling, euro and yen to determine whether long run diversification gains were achievable by international investors with these as base currencies. Cointegrating relations among currency hedged returns are also investigated. Cointegration findings, and by inference long run diversification opportunities, are found to be highly sensitive to the choice of currency in which returns are denominated and to whether currency risk is hedged, revealing the important role of exchange rates in international portfolio diversification.

Keywords: Cointegration, diversification, asset classes

JEL Classification: G11, G12, G15

Suggested Citation

O'Sullivan, Niall, Stocks and Bonds: Eggs in the Same or Different Baskets - A Cointegration Analysis (August 24, 2002). Available at SSRN: https://ssrn.com/abstract=2269553 or http://dx.doi.org/10.2139/ssrn.2269553

Niall O'Sullivan (Contact Author)

University College Cork ( email )

Department of Economics
University College Cork
Cork, n/a
Ireland

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