RT Journal Article SR Electronic T1 Stocks, Bonds, and Causality JF The Journal of Portfolio Management FD Institutional Investor Journals SP 37 OP 48 DO 10.3905/jpm.2019.45.4.037 VO 45 IS 4 A1 Jamil Baz A1 Steve Sapra A1 German Ramirez YR 2019 UL https://pm-research.com/content/45/4/37.abstract AB 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.TOPICS: Fixed income and structured finance, portfolio management/multi-asset allocation, risk management