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Stock Market Uncertainty and the Stock-Bond Return Relation

Published online by Cambridge University Press:  06 April 2009

Robert Connolly ,
Chris Stivers  and
Licheng Sun
Robert Connolly
Affiliation:
connollr@bschool.unc.edu, University of North Carolina, Kenan-Flagler Business School, McColl Building, Chapel Hill, NC 27599
Chris Stivers
Affiliation:
cstivers@terry.uga.edu, University of Georgia, Terry College of Business, Brooks Hall, Athens, GA 30602
Licheng Sun
Affiliation:
lus14@psu.edu, Penn State Erie, School of Business, 5091 Station Road, Erie, PA 16563.
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Abstract

We examine whether time variation in the comovements of daily stock and Treasury bond returns can be linked to measures of stock market uncertainty, specifically the implied volatility from equity index options and detrended stock turnover. From a forward-looking perspective, we find a negative relation between the uncertainty measures and the future correlation of stock and bond returns. Contemporaneously, we find that bond returns tend to be high (low) relative to stock returns during days when implied volatility increases (decreases) substantially and during days when stock turnover is unexpectedly high (low). Our findings suggest that stock market uncertainty has important cross-market pricing in-fluences and that stock-bond diversification benefits increase with stock market uncertainty.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 1 , March 2005 , pp. 161 - 194
Copyright
Copyright © School of Business Administration, University of Washington 2005

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