TY - JOUR
T1 - The conundrum of stock versus bond prices
AU - Maslov, Sergei
AU - Roehner, Bertrand M.
N1 - Funding Information:
Work at Brookhaven National Laboratory was carried out under Contract No. DE-AC02-98CH10886, Division of Material Science, US Department of Energy. B.M.R. thanks the Theory Institute for Strongly Correlated and Complex Systems at Brookhaven National Laboratory for financial support during visits when part of this work was completed.
PY - 2004/4/1
Y1 - 2004/4/1
N2 - 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.
AB - 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.
KW - Bond prices
KW - Spreads
KW - Stock crashes
KW - Stock prices
UR - http://www.scopus.com/inward/record.url?scp=0742272492&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=0742272492&partnerID=8YFLogxK
U2 - 10.1016/j.physa.2003.11.031
DO - 10.1016/j.physa.2003.11.031
M3 - Article
AN - SCOPUS:0742272492
SN - 0378-4371
VL - 335
SP - 164
EP - 182
JO - Physica A: Statistical Mechanics and its Applications
JF - Physica A: Statistical Mechanics and its Applications
IS - 1-2
ER -