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What is the correlation between risk aversion, stock market indices, credit spreads and long-term interest rates?
Normally, when risk aversion is high, investors are expected to switch from risky assets (corporate bonds, equities) to low-risk assets (sovereign bonds), resulting in falling share prices, wider credit spreads and lower long-term interest rates on sovereign bonds. Conversely, when risk aversion is low, we expect share prices to rise, credit spreads to tighten and long-term interest rates on sovereign bonds to rise. We examine the empirical validity of this mechanism for the United States and the euro zone. For the 1998-2023 period and the 2008-2023 period we see that: Risk perception only has a significant effect on credit spreads; Long-term interest rates are correlated with inflation; Stock market indices show no significant correlation with either risk perception or inflation.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
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