The Breakdown of the Classic Portfolio Hedge: A Markov-Switching Analysis of the US Stock–Bond Correlation

Luka Šikić

Notitia — časopis za ekonomske, poslovne i društvene teme, Vol. 11 No. 1, pp. 97–111

This investigation examines structural changes in the traditional stock–bond relationship during the 2022–2023 inflation period. Using a two-state Markov-Switching model on daily returns from SPY and TLT ETFs (2007–2023), the study reveals that bonds failed as a diversification tool during the 2022 downturn, with both assets simultaneously experiencing high volatility and negative returns — a departure from prior crises where bonds provided portfolio protection.

@Article{sikic_breakdown_2025,
  author  = {Luka Šikić},
  title   = {The Breakdown of the Classic Portfolio Hedge: A Markov-Switching Analysis of the US Stock–Bond Correlation},
  journal = {Notitia},
  year    = {2025},
  volume  = {11},
  number  = {1},
  pages   = {97--111},
  doi     = {10.32676/n.11.1.7}
}