Dynamic correlation of stock and bond returns in Asian markets with determinants of macroeconomic conditions and market risk

This paper examines the dynamic correlation between stock and bond returns for five advanced Asian markets. Test Statistics suggest that co-movements of stock-bond returns are time-varying over the last 15 years in most of the countries in our sample. The stock-bond correlations are positively correlated with Consumer Price Index (CPI) and Gross Domestic Product (GDP) expectations respectively. The results show that during a period of high stock market volatility measured by the respective implied volatilities and conditional variances, there is a divergence between the stock and bond prices movement. We also found that in advanced Asian economies, there is a significant positive correlation between stock-bond returns and bond market risk as measured by the conditional variance of bond returns.