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Understanding the Stock-Bond Correlation – Insights from the Swedish Market

Rönnberg, Sara LU and Klinkert, Beata LU (2024) NEKN01 20241
Department of Economics
Abstract
Historically, the correlation between stocks and bonds has exhibited stable patterns, often maintaining either a positive or negative sign over extended periods. Empirical evidence also shows, however, that this correlation tends to fluctuate due to various economic factors. This thesis aims to explore the presence of variation over time in the stock-bond correlation and to identify the factors responsible for driving this variation, analysing Swedish data spanning from 1990 to 2023. To examine whether the correlation exhibits time variation the study utilises both a Constant and a Dynamic Conditional Correlation Multivariate AR(1), GARCH(1,1) model. The results from the two multivariate models indicate a time-varying stock-bond... (More)
Historically, the correlation between stocks and bonds has exhibited stable patterns, often maintaining either a positive or negative sign over extended periods. Empirical evidence also shows, however, that this correlation tends to fluctuate due to various economic factors. This thesis aims to explore the presence of variation over time in the stock-bond correlation and to identify the factors responsible for driving this variation, analysing Swedish data spanning from 1990 to 2023. To examine whether the correlation exhibits time variation the study utilises both a Constant and a Dynamic Conditional Correlation Multivariate AR(1), GARCH(1,1) model. The results from the two multivariate models indicate a time-varying stock-bond correlation in Sweden. When examining the drivers of the time-varying correlation the study utilises a correlation regression model with the Fisher transformed Pearson’s correlation coefficient as a dependent variable and GDP, GDP volatility, inflation, inflation volatility, and a business cycle dummy variable. The results of the regression analysis show that the volatility of macroeconomic indicators has a stronger relationship with the correlation between stock- and bond returns than the factors themselves. Additionally, the macroeconomic factors have a stronger connection with the stock-bond correlation in periods of recession. (Less)
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author
Rönnberg, Sara LU and Klinkert, Beata LU
supervisor
organization
course
NEKN01 20241
year
type
H2 - Master's Degree (Two Years)
subject
language
English
id
9162808
date added to LUP
2024-10-01 13:09:08
date last changed
2024-10-01 13:09:08
@misc{9162808,
  abstract     = {{Historically, the correlation between stocks and bonds has exhibited stable patterns, often maintaining either a positive or negative sign over extended periods. Empirical evidence also shows, however, that this correlation tends to fluctuate due to various economic factors. This thesis aims to explore the presence of variation over time in the stock-bond correlation and to identify the factors responsible for driving this variation, analysing Swedish data spanning from 1990 to 2023. To examine whether the correlation exhibits time variation the study utilises both a Constant and a Dynamic Conditional Correlation Multivariate AR(1), GARCH(1,1) model. The results from the two multivariate models indicate a time-varying stock-bond correlation in Sweden. When examining the drivers of the time-varying correlation the study utilises a correlation regression model with the Fisher transformed Pearson’s correlation coefficient as a dependent variable and GDP, GDP volatility, inflation, inflation volatility, and a business cycle dummy variable. The results of the regression analysis show that the volatility of macroeconomic indicators has a stronger relationship with the correlation between stock- and bond returns than the factors themselves. Additionally, the macroeconomic factors have a stronger connection with the stock-bond correlation in periods of recession.}},
  author       = {{Rönnberg, Sara and Klinkert, Beata}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Understanding the Stock-Bond Correlation – Insights from the Swedish Market}},
  year         = {{2024}},
}