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Equity-Bond Returns Correlation and the Bond Yield: Evidence of Switching Behaviour from the G7 Markets
Humpe, Andreas | McMillan, David G.
Credit and Capital Markets – Kredit und Kapital, Vol. 49 (2016), Iss. 3 : pp. 415–444
3 Citations (CrossRef)
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Dr. Andreas Humpe, University of Applied Sciences Munich, Part-time lecturer, Schachenmeierstraße 35, 80636 München
Prof. David McMillan, Accounting and Finance Division, Stirling Management School, University of Stirling, FK9 4LA, Scotland, UK
Cited By
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Equity/bond yield correlation and the FED model: evidence of switching behaviour from the G7 markets
Humpe, Andreas | McMillan, David G.Journal of Asset Management, Vol. 19 (2018), Iss. 6 P.413
https://doi.org/10.1057/s41260-018-0091-x [Citations: 2] -
Cross-asset relations, correlations and economic implications
McMillan, David G.
Global Finance Journal, Vol. 41 (2019), Iss. P.60
https://doi.org/10.1016/j.gfj.2019.02.003 [Citations: 11] -
Macroeconomic variables and long-term stock market performance. A panel ARDL cointegration approach for G7 countries
Humpe, Andreas | McMillan, David G. | Camarero, MariamCogent Economics & Finance, Vol. 8 (2020), Iss. 1 P.1816257
https://doi.org/10.1080/23322039.2020.1816257 [Citations: 8]
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.