Time-varying comovement of stock and treasury bond markets in Europe: A quantile regression approach

Using the linear OLS and nonlinear quantile regressions, this study examines nature of dynamic comovement between stocks and treasury bonds in Europe and its main drivers of financial uncertainty and investors' expectations about future economic state. Comovement of the EU asset markets is proxied by pair-wise realized correlations between stock and 10-year treasury bond returns in thirteen European countries from 1994Q1 to 2015Q4. From this study, a lower uncertainty for future financial markets increases comovement of EU stock and bond markets. Investors' higher expectation for future economic growth has a positive effect on the market comovement. The empirical findings support that investors' perceptions about the future state of the economy and financial (stock) market uncertainty are key factors for joint pricing of European stocks and treasury bonds. Importantly, the nonlinear quantile regressions in this study indicate evidence of nonlinear effects of the two economic drivers across the whole distribution of the dependent variable of comovment of the EU asset markets.

Automated summary

The study explores the dynamic comovement between European stocks and treasury bonds using linear OLS and nonlinear quantile regressions, with a focus on the impact of financial uncertainty and investors' expectations about future economic state. Lower financial market uncertainty leads to increased comovement between EU stock and bond markets, while higher expectations for future economic growth have a positive effect on market comovement. Empirical findings suggest that investors' perceptions of the future state of the economy and stock market uncertainty play a crucial role in the joint pricing of European stocks and treasury bonds. Nonlinear effects of these economic drivers are evident across the entire distribution of the dependent variable of comovement of EU asset markets.