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Inflation expectations and the stock-bond nexus in the US: hedging implications

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  • Elham Kamal
  • Naji Jalkh
  • Elie Bouri

Abstract

This paper first examines the impact of inflation expectations on the correlation and tail-dependence between stock and Treasury (corporate) bond markets in the US and then assesses the portfolio and hedging implications. Using dynamic C-vine copula models, the results show in several cases a shift in the stock-bond nexus after conditioning on the levels of inflation expectations. The average dynamic tail-dependence between stocks and 10- and 30-year Treasury bonds becomes positive in the post-Covid era. High inflation expectations intensify the average tail-dependence between stocks and mid-term corporate bonds since the Covid-19 outbreak, and between stock and Treasury bonds from early 2020 to the beginning of the conflict between Russia and Ukraine. A hedging analysis shows that the hedging effectiveness improves after taking into account the impact of inflation expectations on stock-bond nexus, especially in the post-Covid-19 subperiod. This hedging effectiveness sustains after changing the proxy of inflation expectations.

Suggested Citation

  • Elham Kamal & Naji Jalkh & Elie Bouri, 2025. "Inflation expectations and the stock-bond nexus in the US: hedging implications," The European Journal of Finance, Taylor & Francis Journals, vol. 31(6), pages 671-695, April.
    • Handle: RePEc:taf:eurjfi:v:31:y:2025:i:6:p:671-695
    DOI: 10.1080/1351847X.2024.2431503
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