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Stock-bond return correlations: Moving away from “one-frequency-fits-all” by extending the DCC-MIDAS approach

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  • Allard, Anne-Florence
  • Iania, Leonardo
  • Smedts, Kristien

Abstract

This paper explores the determinants of U.S. stock-bond correlations estimated at various frequencies. For this purpose, the two-component DCC-MIDAS model of correlation (Colacito et al., 2011) is used and extended to incorporate a third correlation frequency component. Subsequently, macroeconomic and financial variables are studied as determinants of each component. We show that the daily correlation component is driven by financial market factors, while the monthly component is more influenced by macroeconomic factors. Finally, the yearly component is determined by funding opportunities in the economy. These results are important as they show that different correlation components and determinants should be considered for different investment horizons.

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  • Allard, Anne-Florence & Iania, Leonardo & Smedts, Kristien, 2020. "Stock-bond return correlations: Moving away from “one-frequency-fits-all” by extending the DCC-MIDAS approach," International Review of Financial Analysis, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finana:v:71:y:2020:i:c:s1057521920302015
    DOI: 10.1016/j.irfa.2020.101557
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    More about this item

    Keywords

    Stock-bond correlation; Frequency-variation; Macroeconomic factors; Financial factors; DCC-MIDAS model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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