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Working Paper 2005-003A

"An Econometric Model of Nonlinear Dynamics in the Joint Distribution of Stock and Bond Returns"
by Massimo Guidolin, and Allan Timmermann

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 percent chance suggesting a bounce-back effect from the crash to the recovery state.

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Category > Applied Econometrics
Category > Finance
Author > Massimo Guidolin
Research Papers and Publications: JEL Code > C32
Research Papers and Publications: JEL Code > G21
Research Papers and Publications: JEL Code > C51