Stock and bond market interactions with level and asymmetry dynamics: An out-of-sample application
We model the dynamic interaction between stock and bond returns using a multivariate model with level effects and asymmetries in conditional volatility. We examine the out-of-sample performance using daily returns on the S&P 500 index and 10 year Treasury bond. We find evidence for significant (cross-) asymmetries in the conditional volatility and level effects in bond returns. The out-of-sample covariance matrix forecasts of the model imply that an investor is willing to pay between 129 and 820 basis points per year for using a dynamic trading strategy instead of a passive strategy.
|Keywords||Asymmetric volatility, Level effect, Stock and bond market interaction, Time-varying covariances|
|JEL||Time-Series Models; Dynamic Quantile Regressions (jel C22), Asset Pricing (jel G12)|
|Persistent URL||dx.doi.org/10.1016/j.jempfin.2008.09.001, hdl.handle.net/1765/14489|
|Series||ERIM Top-Core Articles|
|Journal||Journal of Empirical Finance|
de Goeij, P, & Marquering, W.A. (2009). Stock and bond market interactions with level and asymmetry dynamics: An out-of-sample application. Journal of Empirical Finance, 16(2), 318–329. doi:10.1016/j.jempfin.2008.09.001