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The stock–bond comovements and cross-market trading
Mengling Li1; Huanhuan Zheng2; Terence Tai Leung Chong2,3; Yang Zhang4
2016-12-01
Source PublicationJournal of Economic Dynamics and Control
ISSN0165-1889
Volume73Pages:417-438
Abstract

We propose an asset pricing model with heterogeneous agents allocating capital to the stock and bond markets to optimize their portfolios, utilizing the dynamic interaction between the two markets. While some agents focus on the stock market and have more expertise in it, the others specialize in the bond market. Based on their comparative advantages in a particular market, heterogeneous agents constantly revise their investment portfolios by taking into account the time-varying stock–bond return comovements and the changing market conditions. Agents׳ collective investment behavior shapes the stock–bond interlinkage, which feedbacks on their subsequent capital allocations. Using monthly US stock and bond data from January 1990 to June 2014, we estimate the vector autoregression model with threshold and Markov switching mechanisms. We find evidence in support of flight-to-quality and show that it is mainly driven by the technical traders who actively sell stocks and buy bonds during periods of high market uncertainty.

KeywordHeterogeneity Markov Switching Var Stock–bond Comovement Threshold Var
DOIhttps://doi.org/10.1016/j.jedc.2016.10.007
URLView the original
Indexed BySSCI
Language英语
WOS Research AreaBusiness & Economics
WOS SubjectEconomics
WOS IDWOS:000389173600022
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Document TypeJournal article
CollectionDEPARTMENT OF FINANCE AND BUSINESS ECONOMICS
Corresponding AuthorHuanhuan Zheng
Affiliation1.Department of Economics, School of Economics & Wang Yanan Institute of Economics (WISE), Xiamen University, 422 South Siming Road, Xiamen, Fujian, China
2.Department of Economics and Lau Chor Tak Institute of Global Economics and Finance, The Chinese University of Hong Kong, 12 ChakCheung Street, Shatin N.T., Hong Kong
3.Department of International Economics and Trade, Nanjing University, China
4.Faculty of Business Administration, University of Macau, E22, Avenida da Universidade, Taipa, Macau, China
Recommended Citation
GB/T 7714
Mengling Li,Huanhuan Zheng,Terence Tai Leung Chong,et al. The stock–bond comovements and cross-market trading[J]. Journal of Economic Dynamics and Control,2016,73:417-438.
APA Mengling Li,Huanhuan Zheng,Terence Tai Leung Chong,&Yang Zhang.(2016).The stock–bond comovements and cross-market trading.Journal of Economic Dynamics and Control,73,417-438.
MLA Mengling Li,et al."The stock–bond comovements and cross-market trading".Journal of Economic Dynamics and Control 73(2016):417-438.
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