Multiscale Stock-Bond Correlation: Implications for Risk Management

Citation

Alrababa'a A, Alomari M & McMillan D (2021) Multiscale Stock-Bond Correlation: Implications for Risk Management. Research in International Business and Finance, 58, Art. No.: 101435. https://doi.org/10.1016/j.ribaf.2021.101435

Abstract
This paper examines the multiscale return correlation between the stocks and government bonds of different maturities returns in 25 countries. The analysis reveals that developed markets correlations are generally negative at the first time-scale and move in a positive direction at higher scales. This contrasts with emerging markets, where the correlation tends to be positive throughout. Thus, the results support a greater flight-to-safety effect in developed markets. Further evidence highlights the ability of the correlation to produce portfolios with a lower VaR. Results support this at longer time-scales and for both developed and emerging markets. The results here demonstrate the importance of accounting for time-scales in modelling the stock-bond correlation and in constructing portfolios.

Keywords
Correlation; Wavelet; Flight-to-Safety; Value-at-Risk

Journal
Research in International Business and Finance: Volume 58

People

Professor David McMillan

Professor in Finance, Accounting & Finance