The Effects Of Market Uncertainty
In doing some related research, I came across a Federal Reserve Bank of Atlanta research paper that I thought was worth sharing, especially in light of the tendency in recent years for many investors to stretch for yield.
Over the long term, the correlation of Treasury bonds (whether they are short-, intermediate- or long-term) to stocks is virtually zero. However, there is substantial variation in the correlation over time. Chris Stivers, Licheng Sun and Robert Connolly—authors of the 2002 study “Stock Implied Volatility, Stock Turnover, and the Stock-Bond Return Relation”—examined whether the variation in stock-bond return dynamics could be linked to non-return-based measures of stock market uncertainty, specifically the implied volatility from equity index options and stock turnover. The following is a summary of their findings:
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