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Asymmetric dynamics in the correlations of global equity and bond returns

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Author Info
Kevin Sheppard () (University of Oxford - Department of Economics, Manor Road Building, Manor Road, Oxford, OX1 3BJ, United Kingdom.)
Robert F. Engle () (New York University - Department of Economics, 269 Mercer Street, New York , NY 10003, United States.)
Lorenzo Cappiello () (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany.)

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Abstract

This paper investigates the presence of asymmetric conditional second moments in international equity and bond returns. The analysis is carried out through an asymmetric version of the Dynamic Conditional Correlation model of Engle (2002). Widespread evidence is found that national equity index return series show strong asymmetries in conditional volatility, while little evidence is seen that bond index returns exhibit this behaviour. However, both bonds and equities exhibit asymmetry in conditional correlation. Worldwide linkages in the dynamics of volatility and correlation are examined. It is also found that beginning in January 1999, with the introduction of the Euro, there is significant evidence of a structural break in correlation, although not in volatility. The introduction of a fixed exchange rate regime leads to near perfect correlation among bond returns within EMU countries. However, equity return correlation both within and outside the EMU also increases after January 1999. JEL Classification: F3; G1; C5.

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Paper provided by European Central Bank in its series Working Paper Series with number 204.

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Length: 66 pages
Date of creation: Jan 2003
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Handle: RePEc:ecb:ecbwps:20030204

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Related research
Keywords: International finance correlation variance targeting multivariate GARCH international stock and bond correlation.

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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  17. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June. [Downloadable!] (restricted)
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  18. John T. Scruggs, 1998. "Resolving the Puzzling Intertemporal Relation between the Market Risk Premium and Conditional Market Variance: A Two-Factor Approach," Journal of Finance, American Finance Association, vol. 53(2), pages 575-603, 04. [Downloadable!] (restricted)
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