COVID-19 and the forward-looking stock-bond return relationship

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1 Citation (Scopus)

Abstract

The COVID-19 pandemic has caused stock market crashes and collapse of economic activities in many countries. As a result, many investors changed their stock and bond market expectations. This study investigates whether the number of COVID-19 confirmed cases influences the forward-looking stock-bond correlations. We apply a quantile approach that is beneficial to explore non-linear relationships between the forward-looking stock-bond return correlations and the COVID-19 cases. The correlations are estimated using the DCC-GARCH model for 21 financial markets from three regions (North American, Asia-Pacific, and Europe). We present empirical evidence that there are heterogeneous responses across regions and countries. Specifically, the negative stock-bond correlations weaken as the number of COVID-19 cases in the regions of North America (the U.S. and Canada) and Asia-Pacific (Australia and Japan) increases. Our results suggest that the number of COVID-19 cases is not important. Investors sell risky stocks and buy safe Treasury bonds at the beginning of the pandemic, while they adjust their portfolios risk levels when they obtain more information. Our result also highlights that this pattern is not observed in European countries.

Original languageEnglish
JournalApplied Economics Letters
DOIs
Publication statusAccepted/In press - 2021

Keywords

  • COVID-19
  • DCC-GARCH
  • International financial markets
  • Stock-bond correlations

ASJC Scopus subject areas

  • Economics and Econometrics

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