Spillover Impact of the US Unconventional Monetary Policy and Uncertainties on Stock-Bond Correlations

Abstract

This paper investigates the spillover impact of US unconventional monetary policy and uncertainty factors on the time-varying co-movements be-tween the US stock market and 14 advanced countries' bond markets, as based on monthly data from January 2002, to October 2015, and utilising the condi-tional nonlinear quantile regression approach. The empirical results reveal that US unconventional monetary policy has an asymmetric positive effect on stock -bond market co-movements, with a nonlinear effect in France and Denmark and a strong effect in the UK and Finland. Further, US bond market uncertainty has heterogeneous effects on stock-bond market co-movements, with a nonlinear effect in France and Denmark and a strong effect in Finland and Sweden. In addition, default risk spread positively influences stock-bond market co -move-ments across most countries for all quantiles. In contrast, stock-bond market co -movements negatively and symmetrically respond to the US stock market un-certainty in most countries. Finally, stock-bond co-movements exhibit mixed re-sponses to US economic policy uncertainty across countries. Our results have valuable implications for international investors who allocate capital across de-veloped countries' stock and bond markets. Our findings provide important infor-mation for financial communities with regard to diversification and hedging.