Time-varying dependence between stock and government bond returns: International evidence with dynamic copulas

• We estimate time varying dependences between stock and bond returns.
• The approach used is a combination of DCC-GARCH and time varying copulas.
• The results show that the linkage is either positive or negative.
• The negative dependence is broken for some peripheral euro area countries.

This paper investigates the dependence pattern between stock and long-term government bond returns for a wide range of developed countries over the last two decades by using a dynamic DCC-GARCH-copula model. This approach allows obtaining a flexible and comprehensive description of the time variation in the linkage between stock and bond markets.The empirical results show that the dependence structure between stock and 10-year government bond returns varies significantly over time for most countries. In particular, a positive stock–bond association is observed during the 1990s, while the relationship becomes negative from the early 2000s, supporting the presence of flight-to-quality effects. In addition, no evidence of asymmetric and tail dependence is found for the vast majority of countries.