Stock market uncertainty, volatility connectedness of financial institutions, and stock-bond return correlations

Abstract

Whether stock market uncertainty has an influence on subsequent stock-bond return correlations is examined in this paper, with a particular focus on comparing information content of the proxies of stock market uncertainty among the 8VIX index, VIX futures, and the volatility connectedness index of US financial institutions. Our empirical evidence indicates that the volatility connectedness index of US financial institutions provides more information to explain the stock-bond return correlations than the VIX index and VIX futures prices for both linear and nonlinear models. The superior information content of the volatility connectedness index of US financial institutions is in support of intermediary asset pricing theory. Finally, the nonlinear regression analysis suggests that the negative stock-bond return correlations due to investor flight-to-safety become less pronounced when the stock market uncertainty measures are very high.