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In search of the determinants of European asset market comovements

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  • Gomes, Pedro
  • Taamouti, Abderrahim

Abstract

We show, in a broad class of affine general equilibrium models with long-run risk, that the covariances between asset returns are linear functions of risk factors. We use a dynamic conditional correlation model to measure the covariances of stock and sovereign bond markets in the Euro Area. We use a new approach to measure risk factors based on Google search data. The factors explain 50 to 60% of the variation of the covariances between European stocks and 25 to 35% of the covariances between European bonds. The information improves the portfolio performance compared to an equally weighted portfolio.

Suggested Citation

  • Gomes, Pedro & Taamouti, Abderrahim, 2016. "In search of the determinants of European asset market comovements," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 103-117.
  • Handle: RePEc:eee:reveco:v:44:y:2016:i:c:p:103-117
    DOI: 10.1016/j.iref.2016.03.005
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    Cited by:

    1. repec:eee:intfin:v:53:y:2018:i:c:p:263-286 is not listed on IDEAS
    2. repec:eee:reveco:v:53:y:2018:i:c:p:25-38 is not listed on IDEAS

    More about this item

    Keywords

    Stock and bond comovements; Affine general equilibrium models; Eurozone crisis; Google Trends; Portfolio weights modeling;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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