Interrelation and Spillover Effects Between Stocks and Bonds: Cross-Market and Cross-Asset Evidence

50 Pages Posted: 12 Mar 2019

Date Written: January 2019

Abstract

This paper examines the behaviour of stock and bond markets across four major international countries. The results confirm the view that same asset-cross country return correlations and spillovers increase over time. However, the same in not true with variance and covariance behaviour. Volatility spillovers across countries exhibit a substantial amount of time-variation, however, there is no evidence of trending in any direction. Equally, cross asset-same country correlations exhibit both negative and positive values. Further, we report an inverse relation between same asset-cross country return correlations and cross asset-same country return correlations i.e., the stock return correlation across countries increases at the same time the stock and bond return correlation within each country declines. Moreover, results show that the stock and bond return correlations exhibit commonality across countries. Results also demonstrate that stock returns lead movement in bond returns, while US stock and bond returns have predictive power other country stock and bond returns. In terms of the markets analysed, Japan exhibit a distinct nature compared with those of Germany, the UK and the US. The results presented here provide a detailed characterisation of how asset interact both with each other and cross countries and should be of interest to portfolio managers, policy-makers and those interested in modelling cross market behaviour.

Keywords: Stocks, Bonds, Returns, Volatility, Correlation, Causality, VAR, Spillovers

JEL Classification: C22, G12

Suggested Citation

McMillan, David G., Interrelation and Spillover Effects Between Stocks and Bonds: Cross-Market and Cross-Asset Evidence (January 2019). Available at SSRN: https://ssrn.com/abstract=3338465 or http://dx.doi.org/10.2139/ssrn.3338465

David G. McMillan (Contact Author)

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

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