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What moves international stock and bond markets?

Author

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  • Gino Cenedese

    () (Bank of England, UK; The Rimini Centre for Economic Analysis, Italy)

  • Enrico Mallucci

    () (London School of Economics, UK)

Abstract

We study the relation between international mutual fund flows and the different return components of aggregate equity and bond markets. First, we decompose international equity and bond market returns into changes in expectations of future real cash payments, interest rates, exchange rates, and discount rates. News about future cash flows, rather than discount rates, is the main driver of international stock returns. This evidence is in contrast with the typical results reported only for the US. Inflation news instead is the main driver of international bond returns. Next, we turn to the interaction between these return components and international portfolio flows. We find evidence consistent with price pressure, short-term trend chasing, and short-run overreaction in the equity market. We also find that international bond flows to emerging markets are more sensitive to interest rate shocks than equity flows.

Suggested Citation

  • Gino Cenedese & Enrico Mallucci, 2015. "What moves international stock and bond markets?," Working Paper series 15-23, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:15-23
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    References listed on IDEAS

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    Cited by:

    1. Gyntelberg, Jacob & Loretan, Mico & Subhanij, Tientip, 2018. "Private information, capital flows, and exchange rates," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 40-55.
    2. Gino Cenedese & Richard Payne & Lucio Sarno & Giorgio Valente, 2016. "What Do Stock Markets Tell Us about Exchange Rates?," Review of Finance, European Finance Association, vol. 20(3), pages 1045-1080.
    3. Afees A. Salisu & Kazeem Isah, 2017. "Modeling the spillovers between stock market and money market in Nigeria," Working Papers 023, Centre for Econometric and Allied Research, University of Ibadan.
    4. repec:eee:finana:v:52:y:2017:i:c:p:260-280 is not listed on IDEAS
    5. Jiang, Junhua, 2017. "Discount rate or cash flow contagion? Evidence from the recent financial crises," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 315-326.
    6. Alexandros Kontonikas & Charles Nolan & Zivile Zekaite, 2015. "Always and Everywhere Inflation? Treasuries Variance Decomposition and the Impact of Monetary Policy," Working Papers 2015_17, Business School - Economics, University of Glasgow.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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