Title: Comovement changes between stocks and bonds: Evidence from a class of large dimensional threshold group-factor models
Authors: Daniele Massacci - Kings College London (United Kingdom) [presenting]
Mirco Rubin - University of Bristol (United Kingdom)
Dario Ruzzi - University of Bristol (United Kingdom)
Abstract: The determinants of time-varying comovement between U. S. stock and government bond returns are studied as driven by regime changes in equity market volatility measured by the VIX. We introduce a novel group-factor model with regime-dependent factor loadings: the prevailing regime within each group of securities depends on the previous value of the VIX with respect to a threshold. For each security within a group, the large dimension of the panel allows to separately identify systematic and diversiable risk components. Within each regime, we measure comovement between the groups as the share of systematic correlation between them. Using 30 years of monthly data, we find that a lagged value of the VIX larger than 27 determines a significant increase in comovement between U.S. equity returns and the term structure of U.S. interest rates. We propose a test for the change in the average systematic correlation between the two panels in the two regimes.