1
$\begingroup$

I intend to regress the correlation coefficient (rolling window and/or DCC) between NIKKEI 225 adjusted close and 10yr Japanese government bonds on inflation , inflation expectations and other factor which may or may not be important in order to evaluate their relative impact on the correlation coefficient.

However, I can't seem to find a sophisticated enough explanation for the correlation's existence other than the changing dynamics of the demand for these asset classes (viewing them as substitutes).

A discounted dividends model suggest a strictly positive relationship, but the data suggests otherwise.

What are the fundamental reasons for the correlation between stock returns and government bond yields that would explain the correlation switching signs?

Improve this question
$\endgroup$
2
$\begingroup$

Why do you say a DDM suggests a positive relationship between govt bond yield and stock price ? If yield gets higher the present value of future dividends is lower (maintaining risk premium and dividend growth constant).

Also the discount rate is bond yield + risk premium and the risk premium is inversely correlated with the govt bond yield so these effects tend to at least cancel out (during an economic crisis govt bond yields go down but risk premium goes up usually more, furthermore dividend and estimated dividend growth are also lower).

Improve this answer
$\endgroup$
1
  • $\begingroup$ Apologies, I dodn't phrase it correctly, holding dividend growth and risk-premium constant, a positive relationship between bond yield and stock return is to be expected, not stock price. I was wondering whether there are alternative explanations to the varying growth rate or risk premium, other models. What I find is that using DCC there are periods of positive or negative correlation that do not move in the same way as the economic cycle. I am looking for a DCC alternative that relates bond yields and stock price/return. $\endgroup$
    – user30144
    Oct 25 '17 at 21:33

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.