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Smooth Transition Patterns in the Realized Stock Bond Correlation

Listed author(s):
  • Nektarios Aslanidis

    ()

    (Department of Economics, FCEE, University Rovira Virgili)

  • Charlotte Christiansen

    ()

    (School of Economics and Management, Aarhus University and CREATES)

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.

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File URL: ftp://ftp.econ.au.dk/creates/rp/10/rp10_15.pdf
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Paper provided by Department of Economics and Business Economics, Aarhus University in its series CREATES Research Papers with number 2010-15.

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Length: 25
Date of creation: 26 Apr 2010
Handle: RePEc:aah:create:2010-15
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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