Correlation between stock and bond returns and it's determinants: Case of Fragile Five

Abstract

The correlation between stock market returns and government bond yields is helping investors to diversify their investments and hence, reducing their investment risk if the correlation between these asset classes is low or negative. However, the correlation measure is not solely sufficient for investors to diversify their risk considering that correlation between stock market returns and government bond yields and impacted by the same economic conditions. Therefore, it is important understand how correlation between stock market returns and government bond yields is developing over-time and which economic indicators impacting the correlation. The author contributes to the existing literature by modelling the time-varying correlation between stock marketreturnsand governmentbond yields.The currentresearch focused on Turkey,Brazil,South Africa, India and Indonesia. These countries were defined as Fragile Five in 2013 by Morgan Stanley because the currencies of these countries were under high pressure against United States Dollar and shared common vulnerability in their current account levels, inflation, unemployment rate and gross domestic product. These economic indicatorsof Fragile Five are used to determine if the correlation between stock market returns and government bond yields is impacted by...