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The Journal of Portfolio Management

The Journal of Portfolio Management

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Stocks, Bonds, and Causality

Jamil Baz, Steve Sapra and German Ramirez
The Journal of Portfolio Management April 2019, 45 (4) 37-48; DOI: https://doi.org/10.3905/jpm.2019.45.4.037
Jamil Baz
is managing director at PIMCO in Newport Beach, CA. jamil.baz@pimco.com
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Steve Sapra
is executive vice president at PIMCO in Newport Beach, CA. steve.sapra@pimco.com
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German Ramirez
is an analyst at PIMCO in Newport Beach, CA. german.ramirez@pimco.com
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Abstract

In this article, the authors estimate a model establishing the casual relationships between equity and government bond returns. They show that the relationship between stocks and bonds—whether they are positively or negatively related—depends largely on whether a shock emanates from the stock market or the bond market. Equity market shocks are associated with flight-to-quality effets and a negative relationship, whereas bond market shocks typically induce a positive stock-bond relationship. The authors show that the relationship between those two asset classes depends critically on the level of market valuation. When markets are cheap or expensive, the effect of valuation can dominate the transitory impact of equity or bond market shocks. Therefore, investors who wish to form a forward-looking view on the stock-bond relation need to take current market valuation into account.

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The Journal of Portfolio Management: 45 (4)
The Journal of Portfolio Management
Vol. 45, Issue 4
April 2019
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Stocks, Bonds, and Causality
Jamil Baz, Steve Sapra, German Ramirez
The Journal of Portfolio Management Mar 2019, 45 (4) 37-48; DOI: 10.3905/jpm.2019.45.4.037

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Stocks, Bonds, and Causality
Jamil Baz, Steve Sapra, German Ramirez
The Journal of Portfolio Management Mar 2019, 45 (4) 37-48; DOI: 10.3905/jpm.2019.45.4.037
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    • Abstract
    • THE HISTORICAL RECORD
    • STOCKS, BONDS, AND CAUSALITY
    • THE IMPACT OF VALUATION
    • DISCUSSION
    • CONCLUSION
    • APPENDIX
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