Understanding stock-bond return correlation is a key facet in asset mix, asset allocation and in an investor’s portfolio optimisation strategy. For the last couple of decades, several studies have probed this cardinal relationship. While initial literature tries to understand the fundamental pattern of co-movements, later studies aim to model the economic state variables influencing such time-varying volatility behaviour of stock-bond returns. This study provides a systematic literature review in the field of stock and bond return correlation.
The review investigates the existing literature in three key dimensions. First, it examines the effect of macro-economic variables on SB return co-movements. Second, it illustrates the effect of financial integration on the asset correlation dynamics. Third, it reviews the existing models that are employed to estimate the dynamic relationship.
In addition to the systematic review, I conduct an empirical analysis of stock-bond return co-movements on U.S. capital market. Both the literature and the empirical investigation substantiate my claims on existing research gaps and respective scope for further research. Evidence shows that existing models impose strong restrictions on past stock-bond return variance dynamics and yield inconclusive results. I, therefore, propose an alternative method, i.e. copula function approach, to model stock and bond time-varying co-movements. Since the previous studies largely focus on developed economies, I suggest an empirically investigation of emerging economies as well. This will allow me to examine the effect of financial integration on the dynamic asset return correlation.
Apart from this academic contribution, the study provides an illustration of the economic implications which relate to portfolio optimization and minimal-risk hedge ratio.
| Identifer | oai:union.ndltd.org:CRANFIELD1/oai:dspace.lib.cranfield.ac.uk:1826/7880 |
| Date | 08 1900 |
| Creators | Mandal, Anandadeep |
| Contributors | Poshakwale, Sunil |
| Publisher | Cranfield University |
| Source Sets | CRANFIELD1 |
| Language | English |
| Detected Language | English |
| Type | Thesis or dissertation, Masters, MSc |
| Rights | © Cranfield University 2012. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright owner |
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