http://repub.eur.nl/res/aut/9101/ List of Publications en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/14489/ 2009-03-01T00:00:00Z 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. http://repub.eur.nl/res/pub/254/ 2002-11-19T00:00:00Z In this paper we study the impact of macroeconomic news announcements on the conditional volatility of stock and bond returns. Using daily returns on the S&P 500 index, the NASDAQ index, and the 1 and 10 year U.S. Treasury bonds, for January 1982 - August 2001, some interesting results emerge. Announcement shocks appear to have a strong impact on the (dynamics of) bond and stock market volatility. Our results provide empirical evidence thatasymmetric volatility in the Treasury bond market can be largely explained by these macroeconomic announcement shocks. This suggests that the asymmetric volatility found in government bond markets are likely due to misspecification of the volatility model. After including macroeconomic announcements into the model, the asymmetry disappears. Becausefirm-specific news is the most important source of information in the stock market, the asymmetries in stock volatility do not disappear after incorporating macroeconomic announcements into the volatility model. http://repub.eur.nl/res/pub/159/ 2002-01-24T00:00:00Z To analyze the intertemporal interaction between the stock and bond market returns, we allow the conditional covariance matrix to vary over time according to a multivariate GARCH model similar to Bollerslev, Engle and Wooldridge (1988). We extend the model such that it allows for asymmetric effects on conditional variances and covariances. Using weekly U.S. stock and bond market data, we find strong evidence of conditional heteroskedasticity in the covariance between stock and bond market returns. The results indicate that not only variances, but also covariances respond asymmetrically to return shocks. Regardless of the bond market shocks, bad news in the stock market is typically followed by a higher conditional covariance than good news. We find that volatility timing strategies for dynamic asset allocation significantly outperform passive strategies. Even when short-sale restrictions are present and transaction costs are high, the economic value of dynamic trading strategies is larger than that of a passive strategy. Moreover, the symmetric volatility timing strategy is outperformed by its asymmetric counterpart.