Impact of US Unconventional Monetary Policy on Dynamic Stock-Bond Correlations: Portfolio Rebalancing and Signaling Channel Effects

This research examines the effects from unconventional monetary policy through, portfolio rebalancing and signaling channels, on the dynamic correlation between US stock and bond markets, as well as on the dynamic correlation between US stock (bond) and other advanced countries’ bond (stock) markets. The research utilised daily data from 26 November 2008 to 30 November 2015, utilising the conditional nonlinear quantile regression approach. The empirical results reveal that the portfolio rebalancing channel exerts strong and predominantly negative effects on the dynamic correlation between US stock and bond markets, as well as between US bond and other advanced countries’ stock markets. In contrast, the signaling channel exerts quite strong and weak positive effects on the dynamic correlation between US stock and bond markets, as well as between US bond and other advanced countries’ stock markets, respectively. The results also provide evidence of asymmetric effects from portfolio rebalancing and signaling channels on the dynamic correlation between US stock and bond markets at lower quantiles, while only the portfolio rebalancing channel asymmetrically affects the dynamic correlation between US bond and other advanced countries’ stock markets at lower quantiles. Thus, these findings provide valuable information for traders and portfolio managers who allocate capital with the US and across other developed countries’ stock and bond markets. Keywords: Dynamic stock-bond market correlations, portfolio rebalancing and signaling channels, quantile regression