Stock-Bond Dependence Structure, Extreme Risk Spillovers, and Safe Haven Currencies

This dissertation consists of three chapters. The first chapter primarily analyzes the dependence structure between equity and fixed-income markets via a dependence-switching copula. A major finding of the first chapter is that the stock–bond dependence switches between positive and negative dependence regimes. Moreover, the dependence is mainly in the positive regimes before 2000 while mostly in the negative regimes after that, indicating contagions primarily before 2000 and flights afterwards. Especially, the stock–bond dependence switches signs during crises and the COVID-19 pandemic. The second chapter builds on the first and dissects the risk spillovers between equity and bond markets. We examine the downside and the upside Value-at-Risk (VaR) and Conditional Value-at-Risk (CoVaR) to measure the extreme risk spillovers between the two markets. We find evidence of extreme risk spillovers between the stock and the bond markets, with stronger risk spillovers from the bond markets to the stock markets than the other way around. We further find that the downside and the upside risk spillovers are predominately asymmetric, with the downside risk spillovers being greater than the upside risk spillovers. The final chapter examines the comovements between currencies and market risk to detect safe haven currencies. We find clear evidence that the American dollar is a refuge to value during times of heightened global risk aversion. On the other hand, the safe haven features of the yen are not overshadowed by the safe haven behaviour of the US dollar, and the Swiss franc displays similar safe haven attributes to the yen but to a lesser extent. Finally, the euro and the pound exhibit the least safe haven characteristics. This research dramatically enriches the existing literature and is vital for risk management and asset pricing.