Tag Archives: equities

Bitesize: More on the bond-equity correlation

Matt Roberts-Sklar.

In a previous post I showed that bond and equity returns are negatively correlated, having been positively correlated for most of the 18th-20th centuries. The time series was long (three centuries) and the chart was just for the UK, prompting two very reasonable questions: 1) does your story hold for countries other than the UK? and 2) what’s happened to this correlation recently?

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Filed under Bitesize, Financial Markets

Home is where your cash flows are? UK-focused equities and the international exposure of the FTSE All-Share

Lu Liu.

Equity prices reflect the market value of public companies, making them an important indicator of the economy.  In practice, stocks by firms listed on the local stock exchange serve as the ‘domestic’ equity benchmark but this might be misleading as an indicator of the national economy:  stock markets track the performance of individual firms, including their international business.  This makes it particularly challenging to extract a signal for the UK economy from UK equity prices, as the universe of UK-listed firms tends to be very global – for instance, around 2/3 of sales represented on the FTSE All-Share are generated abroad.  So for a better read of the UK economy, I’ll look at a subset of more UK-focused stocks and other more domestically-focused UK equity indices.

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Filed under Financial Markets, New Methodologies

Bitesize: 250 years of the bond-equity correlation

Matt Roberts-Sklar.

For most of the 18th-20th centuries, government bonds usually behaved like a risky asset. When equity prices fell, bond yields rose, i.e.  bond and equity returns were positively correlated (bond prices move inversely to yields). But since the mid-2000s, bond and equity returns have been negatively correlated, i.e. bonds became a hedge for risk. Before this, the last time this correlation was near zero for a prolonged period was the long depression in the late 19th century.

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Filed under Bitesize, Economic History, Financial Markets