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Smooth Transition Patterns in the Realized Stock Bond Correlation

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  • Nektarios Aslanidis

    ()
    (Department of Economics, FCEE, University Rovira Virgili)

  • Charlotte Christiansen

    ()
    (School of Economics and Management, Aarhus University and CREATES)

Abstract

This paper re-examines the joint distribution of equity and bond returns using high frequency data. In particular, we analyze the weekly realized stock bond correlation calculated from 5-minute returns of the futures prices of the S&P 500 and the 10-year Treasury Note. A potentially gradual transition in the realized correlation is accommodated by regime switching smooth transition regressions. The regimes are defined by the VIX/VXO volatility index and the model includes additional economic and financial explanatory variables. The empirical results show that the smooth transition model has a better fit than a linear model at forecasting in sample, whereas the linear model is more accurate for out-of-sample forecasting. It is also shown that it is important to account for differences between positive and negative realized stock bond correlations.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2010-15.

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Length: 25
Date of creation: 26 Apr 2010
Date of revision:
Handle: RePEc:aah:create:2010-15

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Web page: http://www.econ.au.dk/afn/

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Keywords: realized correlation; smooth transition regressions; stock bond correlation; VIX index;

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  1. Baur, Dirk G. & Lucey, Brian M., 2009. "Flights and contagion--An empirical analysis of stock-bond correlations," Journal of Financial Stability, Elsevier, Elsevier, vol. 5(4), pages 339-352, December.
  2. Lieven Baele & Geert Bekaert & Koen Inghelbrecht, 2009. "The Determinants of Stock and Bond Return Comovements," NBER Working Papers 15260, National Bureau of Economic Research, Inc.
  3. Allan Timmermann & Massimo Guidolin, 2006. "An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 21(1), pages 1-22.
  4. Luboš Pástor & Robert F. Stambaugh, . "Liquidity Risk and Expected Stock Returns," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Connolly, Robert & Stivers, Chris & Sun, Licheng, 2005. "Stock Market Uncertainty and the Stock-Bond Return Relation," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 40(01), pages 161-194, March.
  6. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  7. Charlotte Christiansen & Angelo Ranaldo & Paul Söderlind, 2010. "The Time-Varying Systematic Risk of Carry Trade Strategies," Working Papers 2010-01, Swiss National Bank.
  8. Yang, Jian & Zhou, Yinggang & Wang, Zijun, 2009. "The stock-bond correlation and macroeconomic conditions: One and a half centuries of evidence," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(4), pages 670-680, April.
  9. Audrino, Francesco & Corsi, Fulvio, 2010. "Modeling tick-by-tick realized correlations," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 54(11), pages 2372-2382, November.
  10. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 385-423.
  11. Nektarios Aslanidis & Charlotte Christiansen, 2010. "Sign and Quantiles of the Realized Stock-Bond Correlation," CREATES Research Papers, School of Economics and Management, University of Aarhus 2010-55, School of Economics and Management, University of Aarhus.
  12. Christiansen, Charlotte & Ranaldo, Angelo, 2005. "Realized Bond-Stock Correlation: Macroeconomic Announcement Effects," Finance Research Group Working Papers, University of Aarhus, Aarhus School of Business, Department of Business Studies F-2005-05, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  13. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(3), pages 339-50, July.
  14. Arturo Estrella & Mary R. Trubin, 2006. "The yield curve as a leading indicator: some practical issues," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 12(Jul).
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Cited by:
  1. Aslanidis, Nektarios & Christiansen, Charlotte, 2011. "Quantiles of the Realized Stock-Bond Correlation," Working Papers, Universitat Rovira i Virgili, Department of Economics 2072/151809, Universitat Rovira i Virgili, Department of Economics.

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