Author(s)

Xuening Li ¹, Yikun Huang ²

Affiliation(s)

¹ New York University Shanghai, Shanghai, China
² Tsinghua University, Beijing, China

Corresponding Author

Xuening Li

ABSTRACT

When abnormal fluctuations occur in the market, the central bank often issues monetary policies to intervene in the market and control the market fluctuations through macroeconomic means. More specifically, adjusting the government bond yield is an extremely important measure for the macroeconomic adjustments to ultimately influence the market. In fact, the yield of government bonds has become the benchmark for market variability and the signpost for investors to judge the market trends. Stock market fluctuations, combined in a barometer of macroeconomic response, have a high degree of correlation with monetary policies. In 1929, the US Federal Reserve ignored the impact of monetary policy on the stock market, adopted a contractionary monetary policy when the market was showing a sign of decline, leading to a crash of stock price and triggering the Great Depression. Thus, bonds and stocks are closely related. However, due to the disparities in market mechanisms and its efficiency, the connection between the stock and bond markets are not as simple as we predicted, from the perspective of macroeconomy. In a mature market with maximal efficiency, a closer connection could be expected between these two securities. This paper, conducts research on the S&P500, the USG 10-yr government bond, the HS300, and the Chinese government bond. It verifies both the long and short-term implicit effects, brought forth by government bonds, on the stock performances in these two countries. Our result supports that such a connection is more significant in the US market than in the Chinese market.

KEYWORDS

Government bond yield, Stock market, Market mechanism

CITE THIS PAPER

Xuening Li, Yikun Huang. The Government Bond Effect on the Stock Performance. Financial Engineering and Risk Management (2021) 4: 51-54. DOI: http://dx.doi.org/10.23977/ferm.2021.040610.

REFERENCES

[1] Chordia, T., Sarkar, A., & Subrahmanyam, A. (2001). An Empirical Analysis of Stock and Bond Market Liquidity. SSRN Electronic Journal. Published. https://doi.org/10.2139/ssrn.289219.
[2] Liow, K. H., Song, J., & Zhou, X. (2021). Volatility connectedness and market dependence across major financial markets in China economy. Quantitative Finance and Economics, 5(3), 397–420. https://doi.org/10.3934/qfe.2021018.
[3] Inverted Yield Curve Definition. (2021, August 24). Investopedia. https://www.investopedia.com/terms/i/invertedyieldcurve.asp.

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