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Stock market uncertainty and the relation between stock and bond returns

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  • Chris Stivers
  • Licheng Sun

Abstract

The authors examine how the co-movement between daily stock and Treasury bond returns varies with stock market uncertainty. They use the lagged implied volatility from equity index options to provide an objective, observable, and dynamic measure of stock market uncertainty. The authors find that stock and bond returns tend to move substantially together during periods of lower stock market uncertainty. However, stock and bond returns tend to exhibit little relation or even a negative relation during periods of high stock market uncertainty. The authors? findings have implications for understanding joint cross-market price formation. Further, their findings imply that diversification benefits increase for portfolios of stocks and bonds during periods of high stock market uncertainty.

Suggested Citation

  • Chris Stivers & Licheng Sun, 2002. "Stock market uncertainty and the relation between stock and bond returns," FRB Atlanta Working Paper 2002-3, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2002-3
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    7. Boda Kang & Christina Nikitopoulos Sklibosios & Erik Schlogl & Blessing Taruvinga, 2019. "The Impact of Jumps on American Option Pricing: The S&P 100 Options Case," Research Paper Series 397, Quantitative Finance Research Centre, University of Technology, Sydney.
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