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Stock-bond co-movements and cross-country linkages

  • Dirk G. Baur

This paper shows empirically that the level of stock-bond correlation depends more on crosscountry influences than on stock and bond market interaction. The study examines the relation of cross-country and cross-asset stock and bond market linkages for eight developed countries and finds that (i) stock market returns primarily depend on the US stock market and (ii) bond market returns primarily depend on the US bond market. Recursive Granger causality tests further show that the dominance of the US stock and bond market has increased in recent years and that there is both Granger causality from stocks to bonds and from bonds to stocks in several periods. We argue that the relatively low level of stock-bond correlations is due to an increased cross-country interdependence of financial markets leading to more frequent portfolio reallocations between stocks and bonds in order to compensate for lower cross-country diversification benefits.

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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp216.

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Date of creation: 04 Apr 2007
Date of revision:
Handle: RePEc:iis:dispap:iiisdp216
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  1. 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.
  2. Geert Bekaert & Campbell R. Harvey & Robin L. Lumsdaine, 1998. "Dating the Integration of World Equity Markets," NBER Working Papers 6724, National Bureau of Economic Research, Inc.
  3. 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.
  4. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
  5. Geert Bekaert & Campbell R. Harvey & Angela Ng, 2005. "Market Integration and Contagion," The Journal of Business, University of Chicago Press, vol. 78(1), pages 39-70, January.
  6. Keim, Donald B. & Stambaugh, Robert F., 1986. "Predicting returns in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 17(2), pages 357-390, December.
  7. Bracker, Kevin & Docking, Diane Scott & Koch, Paul D., 1999. "Economic determinants of evolution in international stock market integration," Journal of Empirical Finance, Elsevier, vol. 6(1), pages 1-27, January.
  8. David Barr & Richard Priestley, . "Expected returns, risk and the integration of international bond markets," CERF Discussion Paper Series 97-04, Economics and Finance Section, School of Social Sciences, Brunel University.
  9. Lieven Baele & Annalisa Ferrando & Peter Hördahl & Elizaveta Krylova & Cyril Monnet, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank.
  10. Jesus Gonzalo & Jose Olmo, 2005. "Contagion Versus Flight To Quality In Financial Markets," Economics Working Papers we051810, Universidad Carlos III, Departamento de Economía.
  11. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
  12. Kim, Suk Joong & Moshirian, Fariborz & Wu, Eliza, 2005. "Dynamic stock market integration driven by the European Monetary Union: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2475-2502, October.
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