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Stock and Bond Relationships in Asia

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Author Info

  • Johansson, Anders C.

    ()
    (China Economic Research Center)

Abstract

This paper analyzes the relationship between stocks and bonds in nine Asian countries. Using a bivariate stochastic volatility model, we show that there are significant volatility spillover effects between stock and bond markets in several of the countries. Furthermore, dynamic correlation patterns show that the relationship between stock and bond markets changes considerably over time in all countries. Stock-bond correlation increases during periods of turmoil in several countries, indicating that there is a cross-asset contagion effect. Therefore, if there is a flight to quality effect in Asian markets, it seems to occur across countries or regions rather than across domestic assets. The results have direct and important implications for regional policy makers as well as domestic and international investors that invest in multiple asset classes.

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File URL: http://swopec.hhs.se/hacerc/papers/hacerc2010-014.pdf
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Bibliographic Info

Paper provided by China Economic Research Center, Stockholm School of Economics in its series Working Paper Series with number 2010-14.

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Length: 31 pages
Date of creation: 01 Apr 2010
Date of revision:
Handle: RePEc:hhs:hacerc:2010-014

Contact details of provider:
Postal: China, Economic Research Center, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-8-736 90 00
Fax: +46-8-31 81 86
Web page: http://www.hhs.se/CERC/
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Related research

Keywords: Asia; stock markets; bond markets; stochastic volatility; Markov Chain Monte Carlo; spillover effects; dynamic correlation;

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References

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  1. Johansson, Anders C., 2008. "Interdependencies among Asian bond markets," Journal of Asian Economics, Elsevier, vol. 19(2), pages 101-116, April.
  2. Charlotte Christiansen, 2007. "Decomposing European Bond and Equity Volatility," CREATES Research Papers 2007-06, School of Economics and Management, University of Aarhus.
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  7. Ehrmann, Michael & Fratzscher, Marcel & Rigobon, Roberto, 2005. "Stocks, bonds, money markets and exchange rates: measuring international financial transmission," Working Paper Series 0452, European Central Bank.
  8. Robert B. Barsky, 1986. "Why Don't the Prices of Stocks and Bonds Move Together?," NBER Working Papers 2047, National Bureau of Economic Research, Inc.
  9. Johansson, Anders C., 2010. "Financial Markets in East Asia and Europe during the Global Financial Crisis," Working Paper Series 2010-13, China Economic Research Center, Stockholm School of Economics.
  10. Andersen, Torben G & Sorensen, Bent E, 1996. "GMM Estimation of a Stochastic Volatility Model: A Monte Carlo Study," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 328-52, July.
  11. Johansson, Anders C. & Ljungwall, Christer, 2009. "Spillover Effects Among the Greater China Stock Markets," World Development, Elsevier, vol. 37(4), pages 839-851, April.
  12. Anders Johansson, 2009. "Stochastic volatility and time-varying country risk in emerging markets," The European Journal of Finance, Taylor & Francis Journals, vol. 15(3), pages 337-363.
  13. Skintzi, Vasiliki D. & Refenes, Apostolos N., 2006. "Volatility spillovers and dynamic correlation in European bond markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(1), pages 23-40, February.
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  17. Lim, Edward S. & Gallo, John G. & Swanson, Peggy E., 1998. "The relationship between international bond markets and international stock markets," International Review of Financial Analysis, Elsevier, vol. 7(2), pages 181-190.
  18. Johansson, Anders C., 2010. "Asian sovereign debt and country risk," Pacific-Basin Finance Journal, Elsevier, vol. 18(4), pages 335-350, September.
  19. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
  20. 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.
  21. Lingfeng Li, 2003. "Macroeconomic Factors and the Correlation of Stock and Bond Returns," Yale School of Management Working Papers ysm328, Yale School of Management.
  22. Kim, Suk-Joong & Moshirian, Fariborz & Wu, Eliza, 2006. "Evolution of international stock and bond market integration: Influence of the European Monetary Union," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1507-1534, May.
  23. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(4), pages 537-572.
  24. 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.
  25. Peter de Goeij, 2004. "Modeling the Conditional Covariance Between Stock and Bond Returns: A Multivariate GARCH Approach," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(4), pages 531-564.
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Cited by:
  1. Johansson, Anders C., 2009. "Asian Sovereign Debt and Country Risk," Working Paper Series 2009-11, China Economic Research Center, Stockholm School of Economics.

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