Work detail

Government bonds and stock market volatility: A Multivariate GARCH Analysis

Author: Aliaksei Aliakseyeu
Year: 2016 - summer
Leaders: prof. Roman Horváth Ph.D.
Work type: Economic Theory
Language: English
Pages: 78
Awards and prizes:
Abstract: The correlation between stock market returns and changes in bond market
yields are of big interest among investors because this indicator helps them
allocate their assets and diversify investment risk more effectively. An investor
should keep track of development of the economies of individual countries,
understand the causes of dissimilarities in the correlations among them
and take these differences into account for successful international financial
investment. The current author contributes to the existing researches by the
modeling of stock-bond market co-movements using the updated datasets with
focus on Central European countries and differences in public debt levels. The
paper contains the empirical analysis of stock and bond market returns conditional
correlations, modeled by the use of the Asymmetric Generalized Dynamic
Conditional Correlation (AG-DCC) Generalized Autoregressive Conditional Heteroskedasticity
(GARCH) specification, for nine Western and Central European
countries (the United Kingdom, Germany, France, Spain, Portugal, Italy, Czech
Republic, Poland and Hungary) that differ both by their geographic locations
and economic development. The main distinctions in the correlations are observed
during the European sovereign debt crisis. The three types of development
are distinguished: 1) correlation noticeably increases (the United Kingdom,
Germany, France), 2) it decreases and becomes negative(Spain, Portugal,
Italy), 3) it stays at the same level as before the crisis (Czech Republic, Poland,
Hungary). As the result the countries are divided into three corresponding
groups. The differences in correlations may be partly explained by economic
interdependence between the countries, their economical maturity and stability
and public debt levels in particular. The inferences help to enhance the understanding
of development of stock-bond market returns correlations which may
lead to more effective decision making on investments, but they are not robust
though: to make them more statistically objective more countries should be
August 2020





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