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In search of the determinants of European asset market comovements

Listed author(s):
  • Gomes, Pedro
  • Taamouti, Abderrahim

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S1059056016000514
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Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 44 (2016)
Issue (Month): C ()
Pages: 103-117

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Handle: RePEc:eee:reveco:v:44:y:2016:i:c:p:103-117
DOI: 10.1016/j.iref.2016.03.005
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620165

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