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Macroeconomic determinants of European stock and government bond relations: a tale of two regions

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  • Erica Perego

    ()
    (CREA, Université de Luxembourg)

  • Wessel N. Vermeulen

    (CREA, Université de Luxembourg)

Abstract

This paper studies the dynamic correlation between stocks, between government bonds and between stocks and bonds within the Euro-zone in the last decade. In order to better understand the development of the financial market we argue that it is necessary to analyse all such relations simultaneously rather than focus at one. We firstly calculate the dynamic correlation for the previous asset classes. Results presented at the asset-region level, i.e. north-stock, north-bonds, south-stocks and south-bonds, visualise the divergence in integration in Europe and highlight the he- terogeneity in these markets. Secondly, we study the macroeconomic factors that determine these correlations. We find that, when we allow for regional division, not only cross-asset correlations within regions behave differently from each other, but also cross-assets cross-regions dynamic correlations can be explained with ma- croeconomic factors such as the relative market uncertainty between countries and balance of payments dynamics.

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File URL: http://wwwfr.uni.lu/content/download/61995/723792/file/2013-08%20-%20Macroeconomic%20determinants%20of%20European%20stock%20and%20government%20bond%20correlations%20-%20A%20tale%20of%20two%20regions.pdf
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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 13-08.

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Date of creation: 2013
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Handle: RePEc:luc:wpaper:13-08

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Keywords: Currency union; financial markets; time-varying correlation.;

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  1. Gikas A. Hardouvelis & Dimitrios Malliaropulos & Richard Priestley, 2006. "EMU and European Stock Market Integration," The Journal of Business, University of Chicago Press, vol. 79(1), pages 365-392, January.
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  8. Salvador Barrios & Per Iversen & Magdalena Lewandowska & Ralph Setzer, 2009. "Determinants of intra-euro area government bond spreads during the financial crisis," European Economy - Economic Papers 388, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  9. Kim, Suk Joong & Moshirian, Fariborz & Wu, Eliza, 2005. "Dynamic stock market integration driven by the European Monetary Union: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2475-2502, October.
  10. Florence Jaumotte & Piyaporn Sodsriwiboon, 2010. "Current Account Imbalances in the Southern Euro Area," IMF Working Papers 10/139, International Monetary Fund.
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  12. Sheppard, Kevin & Cappiello, Lorenzo & Engle, Robert F., 2003. "Asymmetric dynamics in the correlations of global equity and bond returns," Working Paper Series 0204, European Central Bank.
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