Skip header navigation

University of Stirling

×

Article

The information content of the stock and bond return correlation

Citation
McMillan DG (2018) The information content of the stock and bond return correlation. Quantitative Finance and Economics, 2 (3), pp. 757-775. https://doi.org/10.3934/qfe.2018.3.757

Abstract
We believe that the correlation between stock and bond returns carries information for the future values of these return series and economic conditions more widely. The correlation reflects investor perceptions regarding future economic performance, with a declining and negative correlation indicating heightened economic and market risk. Using US data from 1900, we show that the correlation has predictive power for subsequent stock and bond returns and can be used in a market timing strategy to improve portfolio performance. Moreover, the correlation also predicts bear market periods. Further, the correlation contains predictive power for a set of key macroeconomic variables, and has predictive content for contractionary periods. We believe the results in the paper are of interest and relevance to academics, practitioners and policy-makers.

Keywords
stock returns; bond returns; correlation; predictability; macroeconomy; recession

Journal
Quantitative Finance and Economics: Volume 2, Issue 3

StatusPublished
Author(s)McMillan, David G
Publication date31/12/2018
Publication date online06/09/2018
Date accepted by journal31/07/2018
URLhttp://hdl.handle.net/1893/27949
ISSN2573-0134
Scroll back to the top