Stock market uncertainty and the relation between stock and bond returns

The authors examine how the co-movement between daily stock and Treasury bond returns varies with stock market uncertainty. They use the lagged implied volatility from equity index options to provide an objective, observable, and dynamic measure of stock market uncertainty. The authors find that stock and bond returns tend to move substantially together during periods of lower stock market uncertainty. However, stock and bond returns tend to exhibit little relation or even a negative relation during periods of high stock market uncertainty. The authors’ findings have implications for understanding joint cross-market price formation. Further, their findings imply that diversification benefits increase for portfolios of stocks and bonds during periods of high stock market uncertainty.Stock market ; Stocks ; Bonds

Stock Implied Volatility, Stock Turnover, and the Stock-Bond Return Relation

The authors examine how the co-movement between daily stock and Treasury bond returns varies with stock market uncertainty. They use the lagged implied volatility from equity index options to provide an objective, observable, and dynamic measure of stock market uncertainty. The authors find that stock and bond returns tend to move substantially together during periods of lower stock market uncertainty. However, stock and bond returns tend to exhibit little relation or even a negative relation during periods of high stock market uncertainty. The authors’ findings have implications for understanding joint cross-market price formation. Further, their findings imply that diversification benefits increase for portfolios of stocks and bonds during periods of high stock market uncertainty

Commonality in the time-variation of stock–stock and stock–bond return comovements

We jointly investigate time-varying comovements between stock returns across countries and between long-term government bond and stock returns within countries. Our focus is on how daily return comovements vary with stock uncertainty, as measured by the implied volatility (IV) from equity index options. We contribute with the following primary findings. Cross-country stock return comovements tend to be stronger (weaker) following high (low) IV days and on days with large (small) changes in IV. Consistent with earlier work, stock-bond return comovements tend to be substantially positive (negative) following low (high) IV days and on days with small (large) changes in IV. Further, a regime-switching analysis indicates a striking temporal commonality in the stock-stock and stock-bond comovement variations. Our findings bear on understanding the influence of time-varying uncertainty on price formation across asset classes, and on understanding the benefits of stock-bond and cross-country stock diversification

Stock Market Uncertainty and the Stock-Bond Return Relation

We examine whether time-variation in the co-movements of daily stock and Treasury bond returns can be linked to non-return-based measures of stock market uncertainty, specifically the implied volatility from equity index options and detrended stock turnover. From a forward-looking perspective, we find a negative relation between the uncertainty measures and the future correlation of stock and bond returns. From a contemporaneous perspective, we find that bond returns tend to be high (low), relative to stock returns, during days when implied volatility increases (decreases) substantially and during days when stock turnover is unexpectedly high (low). Our findings suggest that stock market uncertainty has important cross-market pricing influences and that stock-bond diversification benefits increase with stock market uncertaint