Analysis of stock–bond correlation drivers indicates that inflation, real rates, and government creditworthiness are key variables. Increases in the stock–bond correlation are linked to greater multi-asset portfolio risk and higher bond risk premia.
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Abstract
The correlation between stock and bond returns is a cornerstone of asset allocation decisions. History reveals abrupt regime shifts in correlation after long periods of relative stability. We investigate the drivers of the correlation between stocks and bonds and find that inflation, real rates, and government creditworthiness are important explanatory variables. We examine the implications of a shift in the stock–bond correlation and find that increases are associated with higher multi-asset portfolio risk and higher bond risk premia.
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