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Stock and bond market interactions with level and asymmetry dynamics: An out-of-sample application

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  • de Goeij, Peter
  • Marquering, Wessel
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    Abstract

    We model the dynamic interaction between stock and bond returns using a multivariate model with level effects and asymmetries in conditional volatility. We examine the out-of-sample performance using daily returns on the S&P 500 index and 10Â year Treasury bond. We find evidence for significant (cross-) asymmetries in the conditional volatility and level effects in bond returns. The out-of-sample covariance matrix forecasts of the model imply that an investor is willing to pay between 129 and 820 basis points per year for using a dynamic trading strategy instead of a passive strategy.

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    File URL: http://www.sciencedirect.com/science/article/B6VFG-4THC1C0-1/2/281a346eef6f4f301092ab271f6a5504
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 16 (2009)
    Issue (Month): 2 (March)
    Pages: 318-329

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    Handle: RePEc:eee:empfin:v:16:y:2009:i:2:p:318-329

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    Web page: http://www.elsevier.com/locate/jempfin

    Related research

    Keywords: Stock and bond market interaction Time-varying covariances Asymmetric volatility Level effect;

    References

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    Cited by:
    1. Wu, Chih-Chiang & Liang, Shin-Shun, 2011. "The economic value of range-based covariance between stock and bond returns with dynamic copulas," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 711-727, September.
    2. Le Pen, Yannick & Sévi, Benoît, 2009. "News and correlations: an impulse response analysis," Economics Papers from University Paris Dauphine 123456789/6804, Paris Dauphine University.

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