Abstract
The correlation between stocks and bonds has been a prominent topic of discussion over the past 5 years, particularly due to the resurgence of inflation risks. Many portfolio managers, who had long assumed that the stock-bond correlation was negative, were surprised when this relationship turned strongly positive in the aftermath of the COVID-19 crisis. This article examines the stock-bond correlation from both a theoretical and an empirical perspective.
Why study the correlation between stocks and bonds? This fundamental concept in finance is closely related to the core principles of asset management and significantly influences both strategic and tactical portfolio allocation decisions. However, understanding this correlation is complex and requires challenging certain commonly held assumptions.
To provide a clear framework for our discussion, we define the stock-bond correlation as the correlation between a country’s stock market index returns and its 10-year government bond returns from the perspective of the local investor, measured in local currency. For example, when analyzing the stockbond correlation in India, we would examine the relationship between the returns on the Nifty stock index and the returns on 10-year Indian government bonds, both denominated in Indian rupees.
Authors
