2003/11/13 by Sergei Maslov, Bertrand M. Roehner
Economics, Econometrics and Finance · Physics and Astronomy · #Complex Systems and Time Series Analysis #Financial Markets and Investment Strategies #Market Dynamics and Volatility #cond-mat
paper · pdf · doi:10.1016/j.physa.2003.11.031
19 pages, 8 figures, 3 tables. To appear in "Physica A"
arxiv created 2003/11/13 · openalex publication_date 2003/12/30 · arxiv updated 2009/12/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
In a general way, stock and bond prices do not display any significant correlation. Yet, if we concentrate our attention on specific episodes marked by a crash followed by a rebound, then we observe that stock prices have a strong connection with interest rates on the one hand, and with bond yield spreads on the other hand. That second relationship is particularly stable in the course of time having been observed for over 140 years. Throughout the paper we use a quasi-experimental approach. By observing how markets respond to well-defined exogenous shocks (such as the shock of September 11, 2001) we are able to determine how investors organize their ``flight to safety'': which safe haven they select, how long their collective panic lasts, and so on. As rebounds come to an end the correlation of stock and bond prices fades away, a clear sign that the collective behavior of investors loses some of its coherence; this observation can be used as an objective criterion for assessing the end of a market rebound. Based on the behavior of investors, we introduce a distinction between ``genuine stock market rallies'', as opposed to spurious rallies such as those brought about by the buyback programs implemented by large companies. The paper ends with a discussion of testable predictions.