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Multiscale stock-bond correlation: Implications for risk management

Author

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  • Al Rababa’a, Abdel Razzaq
  • Alomari, Mohammad
  • McMillan, David
Abstract
This paper examines the multiscale return correlation between the stocks and government bonds of different maturities returns in 25 countries. The analysis reveals that developed markets correlations are generally negative at the first time-scale and move in a positive direction at higher scales. This contrasts with emerging markets, where the correlation tends to be positive throughout. Thus, the results support a greater flight-to-safety effect in developed markets. Further evidence highlights the ability of the correlation to produce portfolios with a lower VaR. Results support this at longer time-scales and for both developed and emerging markets. The results here demonstrate the importance of accounting for time-scales in modelling the stock-bond correlation and in constructing portfolios.

Suggested Citation

  • Al Rababa’a, Abdel Razzaq & Alomari, Mohammad & McMillan, David, 2021. "Multiscale stock-bond correlation: Implications for risk management," Research in International Business and Finance, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:riibaf:v:58:y:2021:i:c:s0275531921000568
    DOI: 10.1016/j.ribaf.2021.101435
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    More about this item

    Keywords

    Correlation; Wavelet; Flight-to-Safety; Value-at-Risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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