Spyros Papathanasiou, Dimitris Kenourgios, Drosos Koutsokostas, Apostolos G. Christopoulos
Purpose The purpose of this paper is to explore the resilience of the 60/40 portfolio allocation within a systemic risk context, by investigating its connectedness with diverse extreme weighting strategies applied to equity (S&P 500, value, growth, ESG, Sharia, high-dividend and global ex US) and bond (treasury, corporate, high-yield and Sukuk) categories. Design/methodology/approach Using daily data from March 1, 2014, to March 1, 2024, the TVP-VAR extended joint connectedness approach is used to examine shock propagation. Findings Empirical investigation reveals that volatility spillovers within the mechanism are intense, with market integration being more strongly triggered by the recent geopolitical turmoil than by the health crisis. Shocks are primarily transmitted from classical S&P 500 and ESG stocks to Sukuk and global (excluding the US) stocks, with volatility transmission being significantly influenced by the 60/40 portfolio. The 60/40 portfolio's spillover effects waned during the pandemic but intensified sharply amidst the subsequent conflict. These findings generally challenge the conventional perception regarding the efficacy of the 60/40 portfolio in mitigating equity risk through bond inclusion. Originality/value This study is the first, to the best of the authors' knowledge, to examine the connectedness of the 60/40 portfolio with various equity and debt security types. Previous research has focused on shock transmission between traditional stocks and bonds, neglecting the specific impact on the widely used 60/40 investment strategy and its interlinkages with different investment styles. In addition, it investigates how the 60/40 portfolio can contribute to risk management and offset the detrimental effects of heightened market volatility in turbulent periods.