Equity-Bond Returns Correlation and the Bond Yield: Evidence of Switching Behaviour from the G7 Markets
Year: 2016
Author: Humpe, Andreas, McMillan, David G.
Credit and Capital Markets – Kredit und Kapital, Vol. 49 (2016), Iss. 3 : pp. 415–444
Abstract
This paper examines the nature of the correlation between (real) equity and bond returns for the G7 markets. From the standpoint of established finance theory, we would expect a positive returns correlation, however, evidence has been presented to suggest that a negative correlation occurs over certain time periods. Using both panel and individual regression for the G7 markets we demonstrate that the correlation is itself positively correlated with the (real) bond yield. While a higher (lower) bond yield is generally associated with both falling (rising) equity and bond prices, a low and falling yield can cause bond prices to rise but equity prices to fall as it implies macroeconomic risk from potential deflation and economic stagnation. Furthermore, our results suggest that a real bond yield of less than 3 % is associated with a negative returns correlation. From an investor view point this suggests the potential for beneficial diversification, while also having implications for asset valuation.
Journal Article Details
Publisher Name: Global Science Press
Language: English
DOI: https://doi.org/10.3790/ccm.49.3.415
Credit and Capital Markets – Kredit und Kapital, Vol. 49 (2016), Iss. 3 : pp. 415–444
Published online: 2016-09
AMS Subject Headings: Duncker & Humblot
Copyright: COPYRIGHT: © Global Science Press
Pages: 30
Keywords: G15 C22 C23 E44 G12 Equity Returns Bond Returns Correlation Bond Yield Switching
Author Details
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