McMillan DG (2020) Explaining the stock-stock, bond-bond and stock-bond correlation across countries. International Journal of Monetary Economics and Finance, 13 (5), pp. 429-445. https://doi.org/10.1504/IJMEF.2020.110553
This paper examines the behaviour of the same asset-cross country and cross-asset same country correlations for stocks and bond for four (Germany, Japan, UK, USA) major economies. Using the realised volatility methodology to construct time-varying correlations, the results reveal that rising same asset correlations occur when cross-asset correlations fall. While there is evidence of segmentation of Japanese assets within international markets. We seek to explain the movement in correlations and note that the variables that exhibit a positive predictive relation for the stock-bond correlation, exhibit a negative predictive relation for the stock-stock and bond-bond correlations and that this is linked to economic conditions. Within this, four variables (inflation, stock returns, consumer sentiment and purchasing managers index) exhibit consistent significance across the regressions. Using these variables, we construct a correlation indicator variable that is used to construct a switching portfolio. This constructed portfolio constructed outperforms buy-and-hold alternatives.
Stocks; Bonds; Correlation; Predictability
International Journal of Monetary Economics and Finance: Volume 13, Issue 5
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