Empirical evidence on the stock-bond correlation
57 Pages Posted: 26 Jul 2023
Date Written: July 19, 2023
The correlation between stock and bond returns is a cornerstone of asset allocation decisions. The correlation can move considerably over time, which can have a large impact on portfolio construction. Our empirical evidence points to inflation and real returns on short-term bonds, and the uncertainty surrounding inflation as important factors for understanding the sign and magnitude of the stock-bond correlation. Our historical analyses across countries suggest that our findings are robust. We apply these insights to analyze the implications of a shift in stock-bond correlation regime for the risk of multi-asset class portfolios and for bonds risk premia.
Keywords: Bonds, Correlation, Inflation, Interest rates, Stocks
JEL Classification: E30, E40, G10, G11, G12, G15
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