Stock-Bond Correlations, Macroeconomic Regimes and Monetary Policy

Abstract

This paper documents a strong association between stock-bond (SB) correlations and monetary policy regimes for a sample of 10 developed markets. Negative stock-bond correlations are associated with periods of accommodating monetary policy, but only in times of low inflation. Irrespective of the inflation and/or growth regime, stock-bond correlations are always positive when monetary policy is restrictive. Pure inflation and growth regimes instead have little explanatory power for stock-bond correlations. Our findings are consistent with recent theoretical research that attributes an important role not only to the cyclicality of inflation but also to monetary policy stance for understanding the dynamics of stock-bond correlations.

Keywords: Stock-Bond Return Correlation, Inflation/Output Regimes, Monetary

JEL Classification: E43, E44, G11, G12, G14