Dynamic Stock-bond Correlation Under The Condition Of Economic Policy Uncertainty

With the development of economic integration and financial globalization, the emergence of various financial derivatives as well as the rapid progress of internet technology, the link and information transmission mechanism between real economies are getting closer. Global financial markets are growing to be an entirety. As a result, it becomes more important to study the correlations between financial markets. Since stock market and bond market are major part of financial markets, this paper focuses on the correlation of stock and bond market based on Asymmetric Dynamic Conditional Correlation model with Exogenous variable (ADCCE). The dynamic stock-bond correlations of U.S., Germany and China are researched, which includes the asymmetry in stock-bond correlation and the impact of economic policy uncertainty. The research results are as follows.To realize our aim of research, Economic Policy Uncertainty Index is employed to measure the degree of economic policy uncertainty. Since the data has been acquired, ADCCE model is constructed based on standard DCC model to fulfill our plan of studying the asymmetry in stock-bond correlation and the impact of economic policy uncertainty. Empirical study is conducted with the data of U.S.,Germany and China. According to the estimates of ADCCE model, it is confirmed that stock-bond correlation is time-varing, which implies that investors should consider this property when constructing their portfolio.In the research of asymmetry of stock-bond correlation, it is discovered that there exists negative asymmetry in the stock-bond correlation of Germany and China but not U.S.On the basis of model estimating, new impact surface, data simulation and historic data back test are employed to further reinforce our conclusions in a more intuitive way. The analysis indicates that the existence of asymmetry is nonnegligible in assessing the stock-bond correlation correctly.Another important aspect of this research is the impact of economic policy uncertainty on stock-bond correlation. The model estimate and historical data simulation shows that the absolute change of economic policy uncertainty, no matter positive or negative, results in the decrease of stock-bond correlation. The reason is that stock market and bond market have different risk-return characteristic. When facing different degree of risk, investors tend to reallocate their assets among stock and bond. This conclusion has significant implication for investors and policymakers.