An Econometric Model of Nonlinear Dynamics in the Joint Distribution of Stock and Bond Returns∗
نویسندگان
چکیده
This paper considers a variety of econometric models for the joint distribution of stock and bond returns in the presence of regime switching dynamics. While simple twoor 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 bull burst states is required to capture the joint distribution of stock and bond returns. The transition probability matrix has a very particular form. Exits from the crash state are almost always to the bull burst state and occur with close to 50 percent chance suggesting a bounceback effect from the crash to the bull burst state.
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