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Stock market uncertainty and the relation between stock and bond returns

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  • Chris Stivers
  • Licheng Sun
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    Abstract

    The authors examine how the co-movement between daily stock and Treasury bond returns varies with stock market uncertainty. They use the lagged implied volatility from equity index options to provide an objective, observable, and dynamic measure of stock market uncertainty. The authors find that stock and bond returns tend to move substantially together during periods of lower stock market uncertainty. However, stock and bond returns tend to exhibit little relation or even a negative relation during periods of high stock market uncertainty. The authors’ findings have implications for understanding joint cross-market price formation. Further, their findings imply that diversification benefits increase for portfolios of stocks and bonds during periods of high stock market uncertainty.

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    File URL: http://www.frbatlanta.org/filelegacydocs/wp0203a.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2002-3.

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    Date of creation: 2002
    Date of revision:
    Handle: RePEc:fip:fedawp:2002-3

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    Keywords: Stock market ; Stocks ; Bonds;

    This paper has been announced in the following NEP Reports:

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    Cited by:
    1. Belter, Klaus & Engsted, Tom & Tanggaard, Carsten, 2005. "A new daily dividend-adjusted index for the Danish stock market, 1985-2002: construction, statistical properties, and return predictability," Research in International Business and Finance, Elsevier, vol. 19(1), pages 53-70, March.
    2. Vellekoop, M.H. & Vd Kamp, A.A. & Post, B.A., 2006. "Pricing and hedging guaranteed returns on mix funds," Insurance: Mathematics and Economics, Elsevier, vol. 38(3), pages 585-598, June.
    3. Sari, Ramazan & Soytas, Ugur & Hacihasanoglu, Erk, 2011. "Do global risk perceptions influence world oil prices?," Energy Economics, Elsevier, vol. 33(3), pages 515-524, May.

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