Stock Market Uncertainty and the Stock-Bond Return Relation

We examine whether time-variation in the co-movements of daily stock and Treasury bond returns can be linked to non-return-based measures of stock market uncertainty, specifically the implied volatility from equity index options and detrended stock turnover. From a forward-looking perspective, we find a negative relation between the uncertainty measures and the future correlation of stock and bond returns. From a contemporaneous perspective, we find that bond returns tend to be high (low), relative to stock returns, during days when implied volatility increases (decreases) substantially and during days when stock turnover is unexpectedly high (low). Our findings suggest that stock market uncertainty has important cross-market pricing influences and that stock-bond diversification benefits increase with stock market uncertainty