Bond Market Volatility Compared to Stock Market Volatility

Abstract

The high volatility of rates of returns on bonds during the 1980s received a great deal of attention because it is readily acknowledged that bond return volatility is critical to the analysis and management of bonds. Yet there has been no detailed analysis of bond market volatility for the pre–1980 period that would allow the experience during the 1980s and the 1990s to be put into perspective. The authors analyze the changing volatility of the government bond market over the past 50 years and examine how these changes compare to the well–documented volatility changes for the stock market. A comparison of Treasury bond market volatility to stock market volatility indicates that the volatility for these two markets has differed dramatically over time. The difference in volatility is confirmed by an analysis of the systematic risk of bonds versus stocks and the moving correlations between bonds and stock over time. In both instances, the pattern indicates a very cyclical series with wide ranges, but also a positive trend. An analysis of the time series properties of bond and stock volatility likewise indicates significant differences.