Yet the quant argot is useful when considering perhaps the biggest fear stalking financial markets: a sustained rise in inflation that would be bad for both equities and bonds. A quant might describe this as a flip in the bond-equity correlation from negative to positive. That is none too elegant, though. A better choice is a term used in geopolitics as well as econometrics: regime change.
The second stylised fact concerns a secular relationship rather than a cyclical one. Since the early 1980s bond and equity prices have moved in the same broad direction—upwards. If you look at low-frequency data over a long period, the bond-equity correlation is positive. This is best understood in terms of yields rather than prices. For the past four decades, there has been a secular decline in government-bond yields, reflecting a secular decline in interest rates.
Indeed, inflation is central to the bond-equity relationship. It is here that things become trickier, and the notion of regime change matters. Bonds promise fixed cash payments in the future. Those cashflows are worth less when inflation unexpectedly rises. By contrast, equities have generally outpaced inflation over the long haul. But the relationship between inflation and equity prices is not stable.
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monetarism, definitely an ideology hard to overthrow
Exactly, 'the People' can't think of anything else. I just opened the window, the people was arguing lively about the bond-equity relationship, at the supermarket the same. Now it's everywhere...
wow
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Bond yields low, equity yields equally low means prices are high
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