Trade uncertainty impact on stock–bond correlations:insights from conditional correlation models

This paper investigates the impact of Trade Policy Uncertainty (TPU) on stock–bondcorrelation dynamics in the United States. Using daily data on major U.S. stock indicesand the 10-year Treasury bond from 2015 to 2025, we estimate correlation within a two-step GARCH-based framework, relying on multivariate specifications, including ConstantConditional Correlation (CCC), Smooth Transition Conditional Correlation (STCC), andDynamic Conditional Correlation (DCC) models to test the hypothesis that political agen-cy significantly alters market structures. We extend these frameworks by incorporatingthe TPU index and a presidential dummy as exogenous social and political indicators tocapture the effects of trade uncertainty and government cycles. The findings show thatconstant correlation models are strongly rejected in favor of time-varying specificationscapable of reflecting the fluid nature of investor expectations. Both STCC and DCC mod-els confirm TPU’s central role in driving correlation dynamics, with significant differencesacross political regimes. DCC models augmented with TPU and political effects deliverthe best in-sample fit and strongest forecasting performance, demonstrating the necessityof integrating political variables into econometric modeling to achieve a more robust un-derstanding of market interdependencies.