Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns

66 Pages Posted: 4 Feb 2003

See all articles by Lorenzo Cappiello

Lorenzo Cappiello

European Central Bank (ECB)

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Kevin Sheppard

University of Oxford - Department of Economics; University of Oxford - Oxford-Man Institute of Quantitative Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 2003

Abstract

This paper investigates the presence of asymmetric conditional second moments in international equity and bond returns. The analysis is carried out through an asymmetric version of the Dynamic Conditional Correlation model of Engle (2002). Widespread evidence is found that national equity index return series show strong asymmetries in conditional volatility, while little evidence is seen that bond index returns exhibit this behaviour. However, both bonds and equities exhibit asymmetry in conditional correlation. Worldwide linkages in the dynamics of volatility and correlation are examined. It is also found that beginning in January 1999, with the introduction of the Euro, there is significant evidence of a structural break in correlation, although not in volatility. The introduction of a fixed exchange rate regime leads to near perfect correlation among bond returns within EMU countries. However, equity return correlation both within and outside the EMU also increases after January 1999.

Keywords: International Finance, Correlation, Variance Targeting, Multivariate GARCH, International Stock and Bond correlation

JEL Classification: F3, G1, C5

Suggested Citation

Cappiello, Lorenzo and Engle, Robert F. and Sheppard, Kevin Keith, Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns (January 2003). ECB Working Paper No. 204. Available at SSRN: https://ssrn.com/abstract=376223

Lorenzo Cappiello (Contact Author)

European Central Bank (ECB) ( email )

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Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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New York University (NYU) - Department of Finance

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Kevin Keith Sheppard

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University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

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