Correlation between bond market and stock market returns : empirical analysis from the american and german markets

Using monthly stock and bond returns data in the past twenty years for both the United States and Germany, this master’s thesis investigates the time-varying correlation between the two main asset classes. Emphasis is placed on the evolution of this relationship during periods of market turmoil; characterized by the “flight-to-quality” phenomenon. The empirical results indicate that crisis episodes, stock market uncertainty (as measured by the VIX and the VDAX) and globalization affect negatively the stock-bond correlation. By contrast, the term spread has a positive impact on both relationships. The TED spread and oil prices, for their part, only influence the American interaction. This research is motivated by its critical implications for asset allocation, portfolio optimization and risk management.