DYNAMIC LINKAGES AND GRANGER CAUSALITY BETWEEN SHORT-TERM US CORPORATE BOND AND STOCK MARKETS

It is sought to investigate a possible long-run association and Grange r causality between US stock and short-term corporate bond markets by applying the well-known cointegration and error-correction methodology . The unit root tests reveal that the rates of return from S&P 500 and short-term US corporate bond yields are non-stationary in levels. The ADF test finds them cointegrated at 1, 5 and 10% levels of significan ce. The estimated error-correction model confirms a long-run relations hip between these two markets. The short-term US corporate bond market appears to Granger-cause the US stock market in the long run. Further more, there appears to be a two-way short-run Granger causality and re versible feedback between these two markets.