Working Paper

An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns

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: time series analysis; Stocks; bond markets;

Status: Published in Journal of Applied Econometrics, January 2006, 21(1), pp. 1-22

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2005

Number: 2005-003