In this study, we provide an overview of stock-bond correlation modeling.

Key Points

Stock-bond correlation is an important component of portfolio allocation. It is widely used by institutional investors to determine strategic asset allocation, and is carefully monitored by multi-asset fund managers to implement tactical asset allocation. Over the past 20 years, the correlation between stock and bond returns in the US has been negative, while it was largely positive prior to the dot-com crisis. Investors currently believe that a negative stock-bond correlation is more beneficial than a positive stock-bond correlation because it reduces the risk of a balanced portfolio and limits drawdowns during periods of equity market distress.