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Comparative Analysis of the Dynamic Stock-Bond Relationship on Developed and Emerging Markets

Student: Zhvaliuk Anastasiia

Supervisor: Evgenia Mikova

Faculty: Faculty of Economic Sciences

Educational Programme: Financial Markets and Financial Institutions (Master)

Year of Graduation: 2020

This paper analyzes the dynamic correlation between stocks and long-term government bonds of developed and emerging countries in the period of 2006-2018. The issue of the stock-bond relationship is actively discussed. There are different opinions how the stock and bond markets correlate with each other. On the one hand, the correlation is positive, since both stocks and bonds are affected by the same macroeconomic factors, such as inflation expectations or economic growth. On the other hand, the relationship may also be negative due to flight to quality effect mostly appearing in crisis. The main goal of the study is to determine the nature of the dynamic correlation between stocks and long-term government bonds in the period of crisis and economic stability in various countries of the world. The significant differences between developed and emerging economies were observed. Flight to quality effect was found in developed countries in 2006-2018. The changes in stock market yields, associating with a decline in stock index prices, cause a fall of yields to maturity on the bond market and an increase in government bond prices. During crisis the correlation grows. As for emerging countries, the hypothesis about contagion effect for India and Turkey was confirmed: during periods of crisis and growth the stock and government bond markets are influenced by the contagion effect. It causes these markets to move in the same direction. This hypothesis was partially confirmed for Russia and Brazil. However, during the crisis there is no correlation. There is no connection between equity and bond markets in China either during periods of economic stability and crises.

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