Working Paper Series,
Stockholm School of Economics, China Economic Research Center

Abstract: This paper analyzes the relationship between stocks and bonds in nine Asian countries. Using a bivariate stochastic volatility model, we show that there are significant volatility spillover effects between stock and bond markets in several of the countries. Furthermore, dynamic correlation patterns show that the relationship between stock and bond markets changes considerably over time in all countries. Stock-bond correlation increases during periods of turmoil in several countries, indicating that there is a cross-asset contagion effect. Therefore, if there is a flight to quality effect in Asian markets, it seems to occur across countries or regions rather than across domestic assets. The results have direct and important implications for regional policy makers as well as domestic and international investors that invest in multiple asset classes.

Keywords: Asia; stock markets; bond markets; stochastic volatility; Markov Chain Monte Carlo; spillover effects; dynamic correlation

JEL-codes: C32; F30; G12; G15

31 pages, April 1, 2010

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