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.

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doi.org/10.1016/j.jempfin.2008.09.001, hdl.handle.net/1765/14489
ERIM Top-Core Articles
Journal of Empirical Finance
Erasmus Research Institute of Management

de Goeij, P., & Marquering, W. (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