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Interdependence between the stock market and the bond market in one country: evidence from the subprime crisis and the European debt crisis

Author

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  • Ke Cheng

    () (China University of Petroleum)

  • Xiaoguang Yang

    () (China University of Petroleum
    Academy of Mathematics and Systems Sciences, China’s Academy of Sciences)

Abstract

Abstract Background Once a global financial crisis breaks out, the interdependence between different financial markets suddenly increases and leads to a significant contagion. Methods With 39 countries used as samples, this paper analyzes the interdependence between the stock market and the government bond market during the crisis periods. Results It proves that the investor focuses more on the safety of their portfolio so there is neither a flight from quality nor a positive spillover during a crisis period. When one market is safer than the other market in the same country, a flight to quality occurs between the two markets; however, when the two markets in one country are both risky, negative spillover appears between these two markets. Conclusions This means a flight to quality from the stock market to the short-term government bond will occur more frequently than will occur from the stock market to the long-term government bond markets. In addition, a flight to quality always emerges in developed markets, while negative spillovers take place in emerging markets and in the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain, referred to hereon as “PIIGS”) in the European Debt Crisis.

Suggested Citation

  • Ke Cheng & Xiaoguang Yang, 2017. "Interdependence between the stock market and the bond market in one country: evidence from the subprime crisis and the European debt crisis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 3(1), pages 1-22, December.
  • Handle: RePEc:spr:fininn:v:3:y:2017:i:1:d:10.1186_s40854-017-0055-z
    DOI: 10.1186/s40854-017-0055-z
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    References listed on IDEAS

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    1. Brière, Marie & Chapelle, Ariane & Szafarz, Ariane, 2012. "No contagion, only globalization and flight to quality," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1729-1744.
    2. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    3. Chan, Kam Fong & Treepongkaruna, Sirimon & Brooks, Robert & Gray, Stephen, 2011. "Asset market linkages: Evidence from financial, commodity and real estate assets," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1415-1426, June.
    4. 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.
    5. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    6. Vayanos, Dimitri, 2004. "Flight to quality, flight to liquidity, and the pricing of risk," LSE Research Online Documents on Economics 456, London School of Economics and Political Science, LSE Library.
    7. Lang, William W. & Nakamura, Leonard I., 1995. "'Flight to quality' in banking and economic activity," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 145-164, August.
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