Bond and stock market comovement: Evidence from emerging markets

Bond And Stock Market Comovement: Evidence From Emerging Markets The theory of modern portfolio suggest that it is needed to be benefitted from investment tools with negative correlation to be able to ofset the risk and return with each other. Financial crisis and economic liberalisation processes increases the correlation between stock markets. Therefore, investors tend to invest in fixed interest markets. It is important for investors to identify the correlation between the bond – as a fixed interest instrument – and stock. The correlation between the bond and stock markets is defined in financial literature as flight-to-quality phenomenia. The purpose of this thesis is to investigate the validation of hypothesis of flight-to-quality in Turkey, The Czech Republic, Greece, Hungary, and Russia. In this research, firstly, the models of GARCH and GJR-GARCH models are used to calculate volatility with daily-frequency data with the JP Morgan Emerging market database in between 31st October, 2012 and 11th October, 2016. Secondly, to identify whether there is a correlation changing in accordance with time the models called as DCC-GARCH and DCC-GJR-GARCH are employed. As a result, the hypothesis is rejected, because there is a positive correlation between stock and bond in the developing countries. Keywords:Stock, Bond, Flight-To-Quality, DCC-GARCH, DCC-GJR-GARCH