Correlations Dynamics between Stock and Bond Returns: Evidence from India

This study looks at the relationship between stocks and bond market of India from December 2003 to March 2010. It examines whether the correlations between the two classes of assets are time-varying by using multivariate conditional volatility models. We start our investigation by Bollerslev (1990) Constant conditional correlation model to test whether varying correlations are statistically significant. Then we use a DCC-GARCH (1, 1) model proposed by Engle (2002) to analyze the dynamics of conditional correlations between the two assets. Our empirical results do not support the assumption of constant conditional correlation. There is clear evidence of time varying correlations between Indian stocks and bond market.