The conundrum of stock versus bond prices

Sergei Maslov, Bertrand M. Roehner

Research output: Contribution to journalArticlepeer-review


In a general way, stock and bond prices do not display any significant correlation. Yet, if we concentrate our attention on the specific episodes marked by a crash followed by a rebound, then we observe that stock prices have a strong connection with interest rates on one hand, and with bond yield spreads on the other hand. That second relationship is particularly stable in the course of time having been observed for over 140 years. Throughout the paper we use a quasi-experimental approach. By observing how markets respond to well-defined exogenous shocks (such as the shock of 11 September 2001) we are able to determine how investors organize their "flight to safety": which safe haven they select, how long their collective panic lasts, and so on. As rebounds come to an end the correlation of stock and bond prices fades away, a clear sign that the collective behavior of investors loses some of its coherence; this observation can be used as an objective criterion for assessing the end of a market rebound. Based on the behavior of investors, we introduce a distinction between "genuine stock market rallies", as opposed to spurious rallies such as those brought about by the buyback programs implemented by large companies. The paper ends with a discussion of testable predictions.

Original languageEnglish (US)
Pages (from-to)164-182
Number of pages19
JournalPhysica A: Statistical Mechanics and its Applications
Issue number1-2
StatePublished - Apr 1 2004
Externally publishedYes


  • Bond prices
  • Spreads
  • Stock crashes
  • Stock prices

ASJC Scopus subject areas

  • Statistics and Probability
  • Condensed Matter Physics


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