Changing Dynamic Relationships between Stock and Bond Markets in Crises: Evidence of a Flight to Quality

This research explores the dynamic relationship between the domestic stock and bond returns for developed and emerging markets in order to approximate the time varying of inter-market integration and identify its main economic and financial determinants. The results show firstly that there is a significant time-varying conditional correlations between stock and bond indices. During crisis periods or turbulence, dynamic conditional correlations (DCC) fall and even become negative for developed countries, confirming the phenomenon of flight to quality in financial markets. This variability is mainly due to the variation of the exchange rate and economic uncertainty in the financial system.
Keywords : Volatility; Stock-bond Correlations; Time-varying Financial Market Integration; Flight to Quality.
JEL Codes: C32; E44; F3; G14; G15.