Stock-Bond Return Correlation: Understanding the Changing Behaviour
David G. McMillan (University of Stirling)
March 2025
The stock and bond return correlation remains important given its central role in, and implications for, portfolio behaviour. Previous, primarily US, evidence indicates sign switching behaviour, which implies that bonds change between being a diversifier and a hedge. This paper considers the time-varying nature of the stock-bond correlation for G7 markets, including its economic drivers, and whether they are themselves time-varying. Using monthly data over a period spanning 1980 to 2023 evidence demonstrates that the correlation switches from positive to negative around 2000 for six of the seven markets (the switch for Japan occurs in the first half of the 1990s).

Financial and Business Cycle Risk Premia
Yifan Ma (Erasmus Research Institute of Management)
March 2025
I estimate financial and business cycles using a regime-switching state-space model, applied respectively to cross-sectional financial variables and macroeconomic aggregates. Analyzing U.S. equity excess returns with OLS regressions and a structural vector autoregression (SVAR) framework, I uncover two key insights. First, financial cycle risk premia diverge fundamentally from business cycle risk premia. While the business cycle premia are countercyclical, financial cycle shocks drive persistent repricing effects. Favorable financial conditions consistently forecast higher subsequent quarter returns. In contrast, the predictability of macro conditions emerges primarily in adverse states. Second, the “financial accelerator mechanism” appears asymmetric. Positive macro shocks lead to higher financial stress in subsequent quarters, whereas favorable financial shocks generate sustained improvements in macroeconomic performance. My results challenge the notion that financial cycles are merely secondary reflections of business cycles, highlighting instead endogenous financial dynamics and consistent pricing effects.

Beyond Conventional Sentiment Indicators: Bitcoin’s Hidden Potential in VIX Forecasting
Ming Gu and Juan Lin (Xiamen University)
April 2025
This study introduces a novel decomposition framework aligned with U.S. stock market trading hours, identifying Bitcoin’s overnight returns as a powerful indicator of investor sentiment. By incorporating Bitcoin’s overnight returns into standard forecasting models, we observe a significant improvement in the predictability of equity market volatility dynamics across both in-sample and out-of-sample analyses. Furthermore, long-short trading strategies based on these enhanced forecasts consistently outperform conventional approaches, generating substantial economic gains. These findings suggest that existing volatility models could benefit from the inclusion of cryptocurrency market signals. Overall, our results highlight the growing integration of cryptocurrency and traditional financial markets.

Asymmetries at the core of short-term return predictability
Johannes Breckenfelder (European Central Bank), et al.
May 2025
We propose a novel approach to improve short-term equity return predictability by analyzing truncated high-frequency return distributions. We segment returns into core and tail components, focusing on core and tail asymmetries-differences between ‘typical’ or ‘extreme’ upside and downside variances. Our empirical findings show that these predictors achieve an in-sample adjusted R 2 of about 7% and an out-of-sample R 2 exceeding 4% for one-month-ahead market return forecasts, outperforming traditional predictors such as valuation ratios and the variance risk premium. The core asymmetry, rather than the tail asymmetry, drives the predictive power.

Media Coverage, Volatility Overreaction, and Option Returns
Lihai Yang (City University of Hong Kong)
April 2025
This paper documents strong media coverage effect in option market. Firms with higher media coverage tend to have lower straddle returns in the next month, which is not explained by other option predictors in literature. I provide supporting evidence for the volatility overreaction in option market: higher media coverage is associated with both higher future realized stock variance and higher current implied variance, while the implied variance responds too much to be reconciled by future realized variance. Alternative explanations, including the investor recognition hypothesis in Fang and Peress (2009), extreme past stock returns, and earnings announcement, cannot fully explain the media coverage effect in option market. Detailed analysis of news topics reveals the five most important topics that drive the media coverage effect, including earnings, revenues, equity actions, acquisition and mergers, and stock prices.

International Financial Markets Through 150 Years: Evaluating Stylized Facts
Sara A. Safari, et al.
April 2025
In the theory of financial markets, a stylized fact is a qualitative summary of a pattern in financial market data that is observed across multiple assets, asset classes and time horizons. In this article, we test a set of eleven stylized facts for financial market data. Our main contribution is to consider a broad range of geographical regions across Asia, continental Europe, and the US over a time period of 150 years, as well as two of the most traded cryptocurrencies, thus providing insights into the robustness and generalizability of commonly known stylized facts.

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