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Macroeconomics determinants of the correlation between stocks and bonds

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  • Marcello Pericoli

    (Bank of Italy)

Abstract

We analyze the correlation between the stock and bond markets in Germany and the US. We use a standard no-arbitrage affine model to decompose the correlation between these two assets into its main drivers. The correlation between bond yields and stock returns is a key determinant of asset allocation. Our results show that the correlation is primarily influenced by the uncertainty about inflation and real interest rates as well as by co-movement between inflation, real interest rates and dividend growth. Shocks to inflation, real interest rates and dividend growth can explain the correlation’s temporary deviation from its long-term dynamics.

Suggested Citation

  • Marcello Pericoli, 2018. "Macroeconomics determinants of the correlation between stocks and bonds," Temi di discussione (Economic working papers) 1198, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1198_18
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    References listed on IDEAS

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    Cited by:

    1. Thomas C. Chiang, 2020. "Risk and Policy Uncertainty on Stock–Bond Return Correlations: Evidence from the US Markets," Risks, MDPI, vol. 8(2), pages 1-16, June.
    2. Aur'elien Alfonsi & Adel Cherchali & Jose Arturo Infante Acevedo, 2019. "A full and synthetic model for Asset-Liability Management in life insurance, and analysis of the SCR with the standard formula," Papers 1908.00811, arXiv.org.
    3. John Foster, 2021. "The US consumption function: a new perspective," Journal of Evolutionary Economics, Springer, vol. 31(3), pages 773-798, July.
    4. Bahmani-Oskooee, Mohsen & Ghodsi, Seyed Hesam & Hadzic, Muris, 2020. "Asymmetric causality between stock returns and usual hedges: An industry-level analysis," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).

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    More about this item

    Keywords

    bond market; stock market; macroeconomic shocks; money illusion;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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