Stock-Bond Correlations, Macroeconomic Regimes and Monetary Policy

78 Pages Posted: 27 Nov 2017

See all articles by Lieven Baele

Lieven Baele

Tilburg University - Department of Finance

Frederiek Van Holle

Degroof Petercam Asset Management

Date Written: October 1, 2017

Abstract

This paper documents a strong association between stock-bond (SB) correlations and monetary policy regimes for a sample of 10 developed markets. Negative stock-bond correlations are associated with periods of accommodating monetary policy, but only in times of low inflation. Irrespective of the inflation and/or growth regime, stock-bond correlations are always positive when monetary policy is restrictive. Pure inflation and growth regimes instead have little explanatory power for stock-bond correlations. Our findings are consistent with recent theoretical research that attributes an important role not only to the cyclicality of inflation but also to monetary policy stance for understanding the dynamics of stock-bond correlations.

Keywords: Stock-Bond Return Correlation, Inflation/Output Regimes, Monetary

JEL Classification: E43, E44, G11, G12, G14

Suggested Citation

Baele, Lieven and Van Holle, Frederiek, Stock-Bond Correlations, Macroeconomic Regimes and Monetary Policy (October 1, 2017). Available at SSRN: https://ssrn.com/abstract=3075816 or http://dx.doi.org/10.2139/ssrn.3075816

Lieven Baele (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 3257 (Phone)
+31 13 466 2875 (Fax)

Frederiek Van Holle

Degroof Petercam Asset Management ( email )

Rue Guimard 18
Brussels, 1040
Belgium
0032474400867 (Phone)

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