Determinants of the Greek stock-bond correlation

Abstract

The stock-bond correlation has been related to market uncertainty and macroeconomic variables. In this paper, we focus on the common pricing process of Greek stocks and bonds, through the correlation of their returns. We derive dynamic conditional correlations of Greek stock and government bond returns, covering the period 1999-2009. We find that the dynamics of the Greek stock-bond correlation are explained by several risk factors, related to liquidity and market’s uncertainty while being subject to spill over effects. Focusing on the recent credit crisis and decoupling effects between stock and bond returns, we find a relation between decoupling effects and market uncertainty and contagion from the Italian market.

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