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Regime Shifts in the Stock–Bond Relation in Australia

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  • Garry Hobbes

    ()
    (Department of Accounting and Finance, Macquarie University, Sydney, NSW, 2109, Australia)

  • Frewen Lam

    ()
    (Macquarie Funds Management, 20 Bond Street, Sydney, NSW, 2000, Australia)

  • Geoffrey F. Loudon

    ()
    (Department of Accounting and Finance, Macquarie University, Sydney, NSW, 2109, Australia)

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    Abstract

    Previous evidence suggests that the implied volatility from equity index options, as a measure of stock market uncertainty, can provide "forward-looking information" about the stock–bond return correlation. This paper uses an alternative regime-switching autoregressive model to characterize state-dependent stock–bond return comovement and to evaluate the contribution of implied volatility in understanding transition dynamics. We confirm that implied volatility provides information about transition dynamics which is not inherent in the stock and bond returns, notwithstanding several different features of our data set and methodological approach.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

    Volume (Year): 10 (2007)
    Issue (Month): 01 ()
    Pages: 81-99

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    Handle: RePEc:wsi:rpbfmp:v:10:y:2007:i:01:p:81-99

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    Related research

    Keywords: Asset pricing; regime-switching; volatility;

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