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Abstract
Bond market and stock market are the two most important financial markets. Study on the volatility of these two markets has always received considerable great attention because volatility is a major risk factor for investors and portfolio managers who regularly make asset-allocation decisions between the two markets. An appropriate statistical analysis of historical and present volatility relationship between these two markets is essential in order to obtain supportive information to make this decision. Global investment is one of the most common methods for diversification. Historical data indicates that, on the average, overseas market outperforms the United States financial markets in terms of rate of returns. Last decade, Hong Kong has become an important international financial center in Asia. It is believed that understanding the volatility in stock and bond market in Hong Kong can shed light on returns and risks to make correct investment diversification decision in US markets. This thesis focuses on the volatility of stock and bond market in Hong Kong from 1991 to 2004. We build time series models to analyze the stock returns volatility, bond returns volatility and the ratio of the two in order to understand the volatility in these two markets.