Smooth Transition Patterns in the Realized Stock Bond Correlation
This paper re-examines the joint distribution of equity and bond returns using high frequency data. In particular, we analyze the weekly realized stock bond correlation calculated from 5-minute returns of the futures prices of the S&P 500 and the 10-year Treasury Note. A potentially gradual transition in the realized correlation is accommodated by regime switching smooth transition regressions. The regimes are defined by the VIX/VXO volatility index and the model includes additional economic and financial explanatory variables. The empirical results show that the smooth transition model has a better fit than a linear model at forecasting in sample, whereas the linear model is more accurate for out-of-sample forecasting. It is also shown that it is important to account for differences between positive and negative realized stock bond correlations.
|Date of creation:||26 Apr 2010|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econ.au.dk/afn/|
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- Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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