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Realized Bond-Stock Correlation: Macroeconomic Announcement Effects

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  • Charlotte Christiansen
  • Angelo Ranaldo

Abstract

We investigate the effects of macroeconomic announcements on the realized correlation between bond and stock returns. Our results deliver insights into the dominating drivers of bond-stock comovements. We find that it is not so much the surprise component of the announcement, but the mere fact that an announcement occurs that influences the realized bond-stock correlation. The impact of macroeconomic announcements varies across the business cycle. Announcement effects are highly dependent on the sign of the realized bond-stock correlation which has recently gone from positive to negative. Macroeconomic announcement effects on realized bond and stock volatilities are also investigated.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2006-02.

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Length: 34 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:snb:snbwpa:2006-02

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Keywords: Bond-stock correlation; Macroeconomic announcements; Realized correlation; Realized volatility;

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References

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  1. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, American Finance Association, vol. 48(4), pages 1161-91, September.
  2. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, Econometric Society, vol. 71(2), pages 579-625, March.
  3. John H. Boyd & Jian Hu & Ravi Jagannathan, 2005. "The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks," Journal of Finance, American Finance Association, American Finance Association, vol. 60(2), pages 649-672, 04.
  4. Charles M. Jones & Owen Lamont & Robin L. Lumsdaine, . "Macroeconomic News and Bond Market Volatility," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 333, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers, University of Pennsylvania, Wharton School, Weiss Center 02-1, University of Pennsylvania, Wharton School, Weiss Center.
  6. Robert J. Shiller & Andrea E. Beltratti, 1990. "Stock Prices and Bond Yields: Can Their Co-Movements Be Explained in Terms of Present Value Models?," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 953, Cowles Foundation for Research in Economics, Yale University.
  7. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0055, National Bureau of Economic Research, Inc.
  8. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2004. "Real-time price discovery in stock, bond and foreign exchange markets," CFS Working Paper Series, Center for Financial Studies (CFS) 2004/19, Center for Financial Studies (CFS).
  9. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 31-50.
  10. Domowitz, I., 1991. "Equally Open and Competitive: Regulatory Approval of Automated Trade Execution in the Future Markets," Papers, Columbia - Center for Futures Markets 214, Columbia - Center for Futures Markets.
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Citations

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Cited by:
  1. Angelo Ranaldo & Paul Söderlind, 2007. "Safe Haven Currencies," Working Papers, Swiss National Bank 2007-17, Swiss National Bank.
  2. Jørgensen, Peter Løchte & De Giovanni, Domenico, 2008. "Time Charters with Purchase Options in Shipping: Valuation and Risk Management," Finance Research Group Working Papers, University of Aarhus, Aarhus School of Business, Department of Business Studies F-2008-05, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  3. 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.
  4. Nektarios Aslanidis & Charlotte Christiansen, 2010. "Smooth Transition Patterns in the Realized Stock Bond Correlation," CREATES Research Papers, School of Economics and Management, University of Aarhus 2010-15, School of Economics and Management, University of Aarhus.
  5. Thomas Q. Pedersen, 2010. "Predictable return distributions," CREATES Research Papers, School of Economics and Management, University of Aarhus 2010-38, School of Economics and Management, University of Aarhus.
  6. Luis M. Viceira & Adi Sunderam & John Y. Campbell, 2008. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," 2008 Meeting Papers 355, Society for Economic Dynamics.
  7. Karali, Berna, 2012. "Do USDA Announcements Affect Comovements Across Commodity Futures Returns?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 37(1), April.
  8. repec:ags:jrapmc:122315 is not listed on IDEAS
  9. Høg, Esben, 2008. "Volatility and realized quadratic variation of differenced returns : A wavelet method approach," Finance Research Group Working Papers, University of Aarhus, Aarhus School of Business, Department of Business Studies F-2008-06, University of Aarhus, Aarhus School of Business, Department of Business Studies.

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