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International stock-bond correlations in a simple affine asset pricing model

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  • d'Addona, Stefano
  • Kind, Axel H.

Abstract

In this paper we use an affine asset pricing model to jointly value stocks and bonds. This enables us to derive endogenous correlations and to explain how economic fundamentals influence the correlation between stock and bond returns. The presented model is implemented for G7 post- war economies and its in-sample and out-of-sample performance is assessed by comparing the correlations generated by the model with conventional statistical measures. The affine framework developed in this paper is found to generate stock-bond correlations that are in line with empirically observed figures

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 30 (2006)
Issue (Month): 10 (October)
Pages: 2747-2765

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Handle: RePEc:eee:jbfina:v:30:y:2006:i:10:p:2747-2765

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Cited by:
  1. Lemke, Wolfgang & Werner, Thomas, 2009. "The term structure of equity premia in an affine arbitrage-free model of bond and stock market dynamics," Working Paper Series 1045, European Central Bank.
  2. Marie Briere & Ariane Chapelle & Ariane Szafarz, 2012. "No Contagion, only Globalization and Flight to Quality," ULB Institutional Repository 2013/149092, ULB -- Universite Libre de Bruxelles.
  3. Chen, XiaoHua & Maringer, Dietmar, 2011. "Detecting time-variation in corporate bond index returns: A smooth transition regression model," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 95-103, January.
  4. Nicolau, Mihaela, 2010. "Financial Markets Interactions between Economic Theory and Practice," MPRA Paper 27322, University Library of Munich, Germany.
  5. Angelos Kanas, 2009. "The relation between the equity risk premium and the bond maturity premium in the UK: 1900–2006," Journal of Economics and Finance, Springer, vol. 33(2), pages 111-127, April.
  6. John Y. Campbell & Adi Sunderam & Luis M. Viceira, 2009. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," NBER Working Papers 14701, National Bureau of Economic Research, Inc.
  7. Durham, J. Benson, 2013. "Arbitrage-free models of stocks and bonds," Staff Reports 656, Federal Reserve Bank of New York.

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