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An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns
Author(s) -
Guidolin Massimo,
Timmermann Allan
Publication year - 2006
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.824
Subject(s) - econometrics , stock (firearms) , joint probability distribution , crash , bond , stock market crash , univariate , econometric model , economics , computer science , stock market , mathematics , statistics , multivariate statistics , finance , engineering , geography , mechanical engineering , context (archaeology) , archaeology , programming language
This paper considers a variety of econometric models for the joint distribution of US stock and bond returns in the presence of regime switching dynamics. While simple two‐ or three‐state models capture the univariate dynamics in bond and stock returns, a more complicated four‐state model with regimes characterized as crash, slow growth, bull and recovery states is required to capture their joint distribution. The transition probability matrix of this model has a very particular form. Exits from the crash state are almost always to the recovery state and occur with close to 50% chance, suggesting a bounce‐back effect from the crash to the recovery state. Copyright © 2006 John Wiley & Sons, Ltd.