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Commonality in the Time-variation of Stock-Bond and Stock-Stock Return Comovements 1

We jointly investigate time-variation in stock-bond return comovements within country and stockstock return comovements across countries by analyzing asset returns from the U.S. and Europe over 1992 to 2002. We examine how daily return comovements vary with stock uncertainty, as measured by the implied volatility (IV) from equity index options. Our findings suggest a striking commonality in the time-variation of stock-bond and stock-stock return comovements. In our sample, stock-bond return comovements tend to be substantially positive (modestly negative) following low (high) IV days and on days with small (large) changes in IV. Cross-country stock return comovements tend to be stronger (weaker) following high (low) IV days and on days with large (small) changes in IV. Our findings support recent research that suggests price formation can be materially influenced by time-varying uncertainty with associated cross-market asset revaluations. Our work also bears on understanding time-varying diversification benefits.