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The conundrum of stock versus bond prices

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  • Maslov, Sergei
  • Roehner, Bertrand M

Abstract

In a general way, stock and bond prices do not display any significant correlation. Yet, if we concentrate our attention on the specific episodes marked by a crash followed by a rebound, then we observe that stock prices have a strong connection with interest rates on one hand, and with bond yield spreads on the other hand. That second relationship is particularly stable in the course of time having been observed for over 140 years. Throughout the paper we use a quasi-experimental approach. By observing how markets respond to well-defined exogenous shocks (such as the shock of 11 September 2001) we are able to determine how investors organize their “flight to safety”: which safe haven they select, how long their collective panic lasts, and so on. As rebounds come to an end the correlation of stock and bond prices fades away, a clear sign that the collective behavior of investors loses some of its coherence; this observation can be used as an objective criterion for assessing the end of a market rebound. Based on the behavior of investors, we introduce a distinction between “genuine stock market rallies”, as opposed to spurious rallies such as those brought about by the buyback programs implemented by large companies. The paper ends with a discussion of testable predictions.

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  • Maslov, Sergei & Roehner, Bertrand M, 2004. "The conundrum of stock versus bond prices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 335(1), pages 164-182.
    • Handle: RePEc:eee:phsmap:v:335:y:2004:i:1:p:164-182
    DOI: 10.1016/j.physa.2003.11.031
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    References listed on IDEAS

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    1. R. Glenn Hubbard, 1991. "Financial Markets and Financial Crises," NBER Books, National Bureau of Economic Research, Inc, number glen91-1, June.
    2. Maslov, Sergei & Mills, Mark, 2001. "Price fluctuations from the order book perspective—empirical facts and a simple model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 234-246.
    3. B. M. Roehner, 2000. "Identifying The Bottom Line After A Stock Market Crash," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 91-100.
    4. Roehner,Bertrand M., 2002. "Patterns of Speculation," Cambridge Books, Cambridge University Press, number 9780521802635, November.
    5. Sergei Maslov & Mark Mills, 2001. "Price fluctuations from the order book perspective - empirical facts and a simple model," Papers cond-mat/0102518, arXiv.org.
    6. Study group on fixed income markets, 2001. "The changing shape of fixed income markets," BIS Papers chapters, in: Bank for International Settlements (ed.), The changing shape of fixed income markets: a collection of studies by central bank economists, volume 5, pages 1-43, Bank for International Settlements.
    7. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108, National Bureau of Economic Research, Inc.
    8. de Bondt, Gabe, 2002. "Euro area corporate debt securities market: first empirical evidence," Working Paper Series 164, European Central Bank.
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    10. the Study group on fixed income markets, 2001. "The changing shape of fixed income markets," BIS Working Papers 104, Bank for International Settlements.
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    Cited by:

    1. Mihaela NICOLAU, 2010. "Financial Markets Interactions between Economic Theory and Practice," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 2, pages 27-36.
    2. Bertrand M. Roehner, 2004. "Stock markets are not what we think they are: the key roles of cross-ownership and corporate treasury stock," Papers cond-mat/0406704, arXiv.org.
    3. Misheck Mutize & Sean J. Gossel, 2019. "Sovereign Credit Rating Announcement Effects on Foreign Currency Denominated Bond and Equity Markets in Africa," Journal of African Business, Taylor & Francis Journals, vol. 20(1), pages 135-152, January.
    4. Roehner, Bertrand M., 2005. "Stock markets are not what we think they are: the key roles of cross-ownership and corporate treasury stock," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 347(C), pages 613-625.

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