Abstract
This paper investigates the spillover impact of US unconventional monetary policy and uncertainty factors on the time-varying co-movements between the US stock market and 14 advanced countries? bond markets, as based on monthly data from January 2002, to October 2015, and utilising the conditional nonlinear quantile regression approach. The empirical results reveal that US unconventional monetary policy has an asymmetric positive effect on stockbond market co-movements, with a nonlinear effect in France and Denmark and a strong effect in the UK and Finland. Further, US bond market uncertainty has heterogeneous effects on stock-bond market co-movements, with a nonlinear effect in France and Denmark and a strong effect in Finland and Sweden. In addition, default risk spread positively influences stock-bond market co-movements across most countries for all quantiles. In contrast, stock-bond market comovements negatively and symmetrically respond to the US stock market uncertainty in most countries. Finally, stock-bond co-movements exhibit mixed responses to US economic policy uncertainty across countries. Our results have valuable implications for international investors who allocate capital across developed countries? stock and bond markets. Our findings provide important information for financial communities with regard to diversification and hedging.
Highlights
The US monetary policy and uncertainty factors have powerful influences on the financial markets (Fratzscher, Lo Duca, and Straub, 2019)
This study investigates the spillover effects of the US unconventional monetary policy (UMP), and financial market and economic policy uncertainties on the time-varying co-movements between the US stock market and advanced countries’ bond markets
US bond yields and dollar exchange rate against the Euro are only significantly affected by the Euro bond yield and short-term rates, while the US short-term interest rates are affected by the Euro short-term rates, bond yields and stock market returns markets (Ehrmann, Marcel, and Roberto, 2011)
Summary
The US monetary policy and uncertainty factors have powerful influences on the financial markets (Fratzscher, Lo Duca, and Straub, 2019). This study investigates the spillover effects of the US UMP, and financial market and economic policy uncertainties on the time-varying co-movements between the US stock market and advanced countries’ bond markets. Along the same lines, Baele et al (2010) demonstrated that interest rates, inflation, uncertainty about inflation and GDP are not important factors in explaining stock–bond return correlations in the US as microfinance factors, especially stock and bond market liquidity In contrast to these studies, there are findings that indicate the importance of macroeconomic factors. Aslanidis and Christiansen (2010) indicated that, at low quantiles of stock–bond correlations, only the volatility of industrial production and bond markets plays a significant positive role in explaining stock–bond co-movements They further indicated that, at high quantiles, stock–bond correlations are negatively influenced by inflation uncertainty, bond market liquidity and stock market volatility. Standard deviations reveal that all advanced countries’ 10year bond returns exhibit significantly lower volatility than the US stock returns, in line with the safe haven characteristic of government bonds
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