Stock Bond Market Research Articles

Stock–bond dependence and flight to/from quality

This paper investigates the stock–bond dependence structure using a dependence-switching copula model. The model allows stock–bond dependence to switch between positive dependence regimes (contagions or crashes of the two markets during downturns or booms in both markets during upturns) and negative dependence regimes (flight-to-quality from stock markets to bond markets or flight-from-quality from bond markets to stock markets). Using data from four developed markets including the US, Canada, Germany, and France for the period between January 1985 and August 2022, we find that the within-country stock–bond (extreme) dependence could be both positive and negative. In the positive dependence regimes, the stock–bond dependence is asymmetric with stronger left tail dependence than the right tail dependence, giving evidence of a higher likelihood of joint stock–bond market crashes or contagions during market downturns than the collective stock–bond market booms. Under the negative dependence regimes, we find both flight-from-quality and flight-to-quality, with flight-to-quality being more dominant in the North American markets while flight-from-quality is more prominent in the European markets. Further, the dependence switches between positive and negative regimes over time. Moreover, the dependence is mainly in the positive regimes before 2000 while mostly in the negative regimes after that, indicating contagions mostly before 2000 and flights afterwards. Further, the dependence switches between positive and negative regimes around financial crises and the COVID-19 pandemic. These results greatly enrich the findings in the existing literature on the co-movements of stock–bond markets and are important for risk management and asset pricing.

Pricing of A European Call Option in Stochastic Volatility Models

Volatility occupies a strategic place in the financial markets. In this context of crisis, and with the great movements of the markets, traders have been forced to turn to volatility trading for the potential gain it provides. The Black-Scholes formula for the value of a European option to purchase the underlying depends on a few parameters which are more or less easy to calculate, except for the realized volatility at maturity which makes a problem, because there is no single value, nor an established way to calculate it. In this article, we exploit the Martingale pricing method to find the expected present value of a given asset relative to a riskneutral probability measure. We consider a bond-stock market that evolves according to the dynamics of the Black-Scholes model, with a risk-free interest rate varying with time. Our methodology has effectively directed us towards interesting formulas that we have derived from the exact calculation, giving the present value of the volatility realized over a period of maturity for a European option in a stochastic volatility model.

Hubungan Kausalitas antara Sentimen Investor dan Pasar Keuangan Indonesia

This study aims to see the causal relationship that occurs between investor sentiment-based google search and the Indonesian stock-bond market in 2020. The test used in this study is a combined test between the quantile test to see the effect of investor sentiment on optimistic (pessimistic) conditions and the Granger causality test to detect the causal relationship that occurs between variables. The results of the study found that there was a one-way relationship between investor sentiment and the Indonesian stock market where investor sentiment affects the stock market. Interestingly, in the bond market, causal relationship between variables can’t be found. This study also found that the causal relationship between investor sentiment variables and financial markets only occurs when the optimistic and pessimistic conditions of investors aren't in extreme conditions.

Spillover impact of the US unconventional monetary policy and uncertainties on stock-bond correlations

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.

Impact of US unconventional monetary policy on dynamic stock-bond correlations: Portfolio rebalancing and signalling channel effects

This paper investigates the impacts of both the portfolio rebalancing and signalling channel effects associated with US unconventional monetary policy on the dynamic correlation between the stock and bond markets at different levels of stock-bond market correlation distributions. The empirical results reveal that the portfolio rebalancing channel has a strong and predominantly negative effect on the dynamic stock-bond market correlations. In contrast, the signalling channel positively affects the dynamic stock-bond market correlations. The results also provide evidence of an asymmetric effect at the lower quantiles. These findings hence provide valuable information for policymakers, traders and portfolio managers.

Determinants of stock-bond market comovement in the Eurozone under model uncertainty

This paper examines the dynamic relationship between stock and bond returns in eleven Eurozone countries during the last seventeen years. The literature so far reports heterogeneous results with respect to the important determinants of the stock-bond relationship. To deal with model uncertainty we employ a Bayesian model averaging technique and examine various macroeconomic and financial variables which are likely to influence stock-bond comovement. Bond and stock market uncertainty, interest rate, inflation and state of the economy are important determinants of cross-asset correlations. Divergence in the dynamic patterns of stock-bond comovement as well as on the effect of economic variables on this comovement is reported during crisis periods and between different European regions. Our results are of high relevance for investment strategies as well as for policy decisions in the European context.

Presidential cycles and time-varying bond–stock market correlations: Evidence from more than two centuries of data

Utilizing a DCC-GARCH model to capture time-varying correlations, we show that Democratic administrations are generally associated with lower degree of co-movement between the stock and government bond returns. The findings are in line with the documented presidential cycle effect on stock market returns and corroborate recent evidence that, when risk aversion is high, agents tend to elect the Democratic Party.

Anomaly in Stock-Bond Correlations: The Role of Monetary Policy

The paper estimates constant conditional correlation (CCC) GARCH models to test whether the dramatic changes in stock-bond market correlations can be explained by monetary policy variables such as OIS interest rate shocks or volatility regimes. We find that both specifications are empirically relevant: Correlations decrease after positive monetary shocks (decreasing rates) as well as in times with large central bank activity (high rate volatility regimes).

On Martingale Measures and Pricing for Continuous Bond-Stock Market with Stochastic Bond

This papers addresses the stock option pricing problem in a continuous time market model where there are two stochastic tradable assets, and one of them is selected as a num'eraire. It is shown that the presence of arbitrarily small stochastic deviations in the evolution of the num'eraire process causes significant changes in the market properties. In particular, an equivalent martingale measure is not unique for this market, and there are non-replicable claims. The martingale prices and the hedging error can vary significantly and take extreme values, for some extreme choices of the equivalent martingale measures. Some rational choices of the equivalent martingale measures are suggested and discussed, including implied measures calculated from observed bond prices. This allows to calculate the implied market price of risk process.

THE COMPATIBLE BOND-STOCK MARKET WITH JUMPS

We construct a bond-stock market composed of d stocks and many bonds with jumps driven by general marked point process as well as by an ℝn-valued Wiener process. By composing these tools we introduce the concept of a compatible bond-stock market and give a necessary and sufficient condition for this property. We study no-arbitrage properties of the composed market where a compatible bond-stock market is arbitrage-free both for the bonds market and for the stocks market. We then turn to an incomplete compatible bond-stock market and give a necessary and sufficient condition for a compatible bond-stock market to be incomplete. In this market we consider the mean-variance hedging in the special situation where both B(u, T) and eG(u, y, T)-1 are quadratic functions of T - u. So, we need to extend the notion of a variance-optimal martingale (VOM) as in Xiong and Kohlmann (2009) to the more general market. By introducing two virtual stocks [Formula: see text], we prove that the VOM for the bond-stock market is the same as the VOM for the new stock market [Formula: see text]. The mean-variance hedging problem in this incomplete bond-stock market for a contingent claim [Formula: see text] is solved by deriving an explicit solution of the optimal measure-valued strategy and the optimal cost induced by the optimal strategy of MHV for the stocks [Formula: see text] is computed.

The Price of Bond Market-Stock Market Correlation Risk

Bonds are attractive investment instruments that complement a broad-based equity portfolio. As the correlation between stocks and bonds increases, investors lose diversification benefits. Stocks that pay out more in states in which the aggregate stock-bond correlation is high will be deemed more attractive and their expected returns should be lower. Our hypothesis is then that the stock market-bond market correlation is a risk factor. To test this, we extract the riskless bond-stock market correlation using several different methods that include the BEKK and the Dynamic Conditional Correlation methods. We examine the price of bond-stock correlation risk in the cross section of stock returns. We find that aggregate correlation carries a statistically significant negative price of risk of about 3 percent that cannot be explained by the market return, size, book-to-market, default spread, term spread, unexpected inflation and other known risk factors.