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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/

Related research

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

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References

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  1. Paul Soderlind & Angelo Ranaldo & Charlotte Christiansen, 2009. "The Time-Varying Systematic Risk of Carry Trade Strategies," University of St. Gallen Department of Economics working paper series 2009 2009-06, Department of Economics, University of St. Gallen.
  2. Charlotte Christiansen & Angelo Ranaldo, 2006. "Realized Bond-Stock Correlation: Macroeconomic Announcement Effects," Working Papers 2006-02, Swiss National Bank.
  3. 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, vol. 12(Jul).
  4. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  5. Lieven Baele & Geert Bekaert & Koen Inghelbrecht, 2007. "The determinants of stock and bond return comovements," Working Paper Research 119, National Bank of Belgium.
  6. Fulvio Corsi & Francesco Audrino, 2008. "Modeling Tick-by-Tick Realized Correlations," University of St. Gallen Department of Economics working paper series 2008 2008-05, Department of Economics, University of St. Gallen.
  7. Nektarios Aslanidis & Charlotte Christiansen, 2010. "Sign and Quantiles of the Realized Stock-Bond Correlation," CREATES Research Papers 2010-55, School of Economics and Management, University of Aarhus.
  8. 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, vol. 40(01), pages 161-194, March.
  9. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
  10. 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, vol. 33(4), pages 670-680, April.
  11. Baur, Dirk G. & Lucey, Brian M., 2009. "Flights and contagion--An empirical analysis of stock-bond correlations," Journal of Financial Stability, Elsevier, vol. 5(4), pages 339-352, December.
  12. 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., vol. 21(1), pages 1-22.
  13. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  14. 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, vol. 12(2-3), pages 385-423.
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Cited by:
  1. Aslanidis, Nektarios & Christiansen, Charlotte, 2011. "Quantiles of the Realized Stock-Bond Correlation," Working Papers 2072/151809, Universitat Rovira i Virgili, Department of Economics.

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