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Do long-term bonds hedge equity risk? Evidence from Spain

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  • Thomas Flavin

    (Department of Economics, Finance and Accounting, Maynooth University.)

  • Dolores Lagoa-Varela

    (Universidad La Coruña, Spain.)

Abstract

We analyze the relationship between returns on equity and long-term government bonds in the Spanish economy. In particular, we are interested in the stability of the relationship across differing market conditions and if long-term bonds deliver diversification benefits during periods of equity market turbulence. Employing a Markov-switching vector autoregression model with three regimes, we find that the Spanish stock-bond relationship varies across market conditions and is positively correlated during ‘Bear’ markets. A sectoral analysis reveals that two sectors – Financials and Oil & Gas – are responsible for this positive comovement with the former being relatively more important. Classification- G01

Suggested Citation

  • Thomas Flavin & Dolores Lagoa-Varela, 2016. "Do long-term bonds hedge equity risk? Evidence from Spain," Economics Department Working Paper Series n275-16.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n275-16.pdf
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    Keywords

    Stock-bond relationship; diversification; Spanish financial markets.;
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