Stocks and bonds: eggs in the same or different baskets. A cointegration analysis
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Date
2002-08
Authors
O'Sullivan, Niall
Journal Title
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Publisher
Centre for Investment Research, University College Cork
Published Version
Abstract
The Johansen cointegration testing and estimation procedure is applied to examine the relationships among the stock markets, government bond markets and credit bond markets of the US, UK, Europe and Japan over the period 1985M1:2002M4. Asset class relationships are examined with returns denominated in dollars, sterling, euro and yen to determine whether long run diversification gains were achievable by international investors with these as base currencies. Cointegrating relations among currency hedged returns are also investigated. Cointegration findings, and by inference long run diversification opportunities, are found to be highly sensitive to the choice of currency in which returns are denominated and to whether currency risk is hedged, revealing the important role of exchange rates in international portfolio diversification.
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Keywords
Cointegration , Diversification , Asset classes
Citation
Niall O'Sullivan (2002) "Stocks and bonds: eggs in the same or different baskets. A cointegration analysis". Centre for Investment Research Working Paper, University College Cork. WP 05-01
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Copyright
© 2002, Niall O'Sullivan.