PT  - JOURNAL ARTICLE
AU  - Liu Xinyi
AU  - Fan Hua
TI  - Stock–Bond Correlation and Duration Risk Allocation
AID  - 10.3905/jpm.2016.42.2.056
DP  - 2016 Jan 31
TA  - The Journal of Portfolio Management
PG  - 56--63
VI  - 42
IP  - 2
4099  - https://pm-research.com/content/42/2/56.short
4100  - https://pm-research.com/content/42/2/56.full
AB  - Using weekly stock-bond correlations estimated with highfrequency data, the authors find that a lower (more negative) stock-bond correlation forecasts falling 10-year interest rates over the coming weeks. It also forecasts falling oneyear interest rates over the next year. The reverse is true when the stock-bond correlation is higher (more positive). Therefore investors, in particular those with long-term, bond-like liabilities, should take greater duration risk when the recent stock-bond correlations are lower. The authors propose two possible explanations of such predictive power: (1) the markets and/or policymakers’ underreaction to the changing economic conditions the stock-bond correlation implies; and (2) the markets’ initial underreaction to the long-term bonds’ safe-haven status.TOPICS: In markets, VAR and use of alternative risk measures of trading risk