An Econometric Model of Nonlinear Dynamics in the Joint Distribution of Stock and Bond Returns
37 Pages Posted: 27 Aug 2004
There are 2 versions of this paper
An Econometric Model of Nonlinear Dynamics in the Joint Distribution of Stock and Bond Returns
An Econometric Model of Nonlinear Dynamics in the Joint Distribution of Stock and Bond Returns
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consumption and Portfolio Decisions When Expected Returns are Time Varying
By John Y. Campbell and Luis M. Viceira
-
On the Predictability of Stock Returns: An Asset-Allocation Perspective
-
Who Should Buy Long-Term Bonds?
By John Y. Campbell and Luis M. Viceira
-
Who Should Buy Long-Term Bonds?
By John Y. Campbell and Luis M. Viceira
-
A Multivariate Model of Strategic Asset Allocation
By John Y. Campbell, Yeung Lewis Chan, ...
-
A Multivariate Model of Strategic Asset Allocation
By John Y. Campbell, Yeung Lewis Chan, ...
-
Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets
By George Chacko and Luis M. Viceira
-
Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets
By George Chacko and Luis M. Viceira