An Empirical Investigation of Stocks and Bonds Markets
Abstract
We examine empirical evidence of the behavior of stocks and bonds from BRIC nations using daily data from January 2003 to July 2010. We present unconditional and conditional empirical results depending upon a simple measure of U.S. financial stress.
In terms of the unconditional volatilities, we find that for stock returns the U.S. crisis spread through Brazil, Russia, China and India. The joint dynamics of stocks and bonds show short term negative correlations with stocks responding negatively and bonds positively to the U.S. stress measure.
The cointegration results confirm some of the short term evidence above, but, most importantly, for the long term, stock index levels in Brazil and India are related to the U.S. financial stress measure, but not stock levels in Russia and China. The bonds market shows that in the long term all EMBI indexes for Brazil, Russia, India and China are related to the U.S. financial stress measure. The joint dynamic behavior of stocks and bonds displays one long run relationship between U.S. financial stress and BRIC bond returns and another for stocks and bonds of BRIC countries only, independent of the U.S. financial stress measure. Bonds markets deviate much more from the U.S. financial stress measure than bonds and stocks of the BRIC nations deviate among themselves
The multivariate GARCH and dynamic conditional correlations results are that in terms of stock returns, all BRIC countries display significant conditional heteroskedasticity with Russia the most responsive country to conditional volatility news, while China does not respond to news. Neither news nor autocorrelation of correlations play a predominant role in the case of dynamic conditional correlations of stock returns.
The dynamic conditional correlations among stock returns of all BRIC nations have increased since the beginning of the financial crisis in September 2008. All BRIC countries display significant conditional heteroskedasticity with Russia the most responsive country to conditional volatility news, while China does respond and shows signs of volatility instability in its bond returns index. In this case, the own correlations are more important in determining the evolution of the conditional correlations of bond returns relative to the unexpected news. The dynamic conditional correlations among bond returns of all BRIC nations have increased after the September 2008 event, but not for India-EMBI which is seen to be insulated and uncorrelated to other BRIC countries.
Keywords: BRIC, stock-bond returns, conditional volatility, dynamic conditional correlation, financial crisis.
JEL Classification Codes: G01, G15.