The dynamics among G7 government bond and equity markets and the implications for international capital market diversification

This paper investigates potential international capital market diversification gains from relationships between global government bond and equity markets. Its primary contributions are (1) including both government debt and equity markets in the investigation of global diversification gains, (2) basing the analysis on real, risk-adjusted returns, and (3) evaluating both variance decompositions and impulse responses, as well as long-term relationships for international U.S. dollar investors. We find the cointegration, variance decomposition, and impulse response function results indicate interdependence and reduction in gains to international diversification.