An Econometric Model of Nonlinear Dynamics in the Joint Distribution of Stock and Bond Returns

37 Pages Posted: 27 Aug 2004

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University, Dept. of Finance; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2004

Abstract

This paper considers a variety of econometric models for the joint distribution of US stock and bond returns in the presence of regime switching dynamics. While simple two- or three-state models capture the univariate dynamics in bond and stock returns, a more complicated four state model with regimes characterized as crash, slow growth, bull and recovery states is required to capture their joint distribution. The transition probability matrix of this model has a very particular form. Exits from the crash state are almost always to the recovery state and occur with close to 50 percent chance suggesting a bounce-back effect from the crash to the recovery state.

Keywords: Regime switching, stock and bond return predictability, nonlinear modeling

JEL Classification: C32, G12, G51

Suggested Citation

Guidolin, Massimo and Timmermann, Allan, An Econometric Model of Nonlinear Dynamics in the Joint Distribution of Stock and Bond Returns (July 2004). Available at SSRN: https://ssrn.com/abstract=582581 or http://dx.doi.org/10.2139/ssrn.582581

Massimo Guidolin (Contact Author)

Bocconi University, Dept. of Finance ( email )

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Allan Timmermann

UCSD ( email )

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HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

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