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Macro-Finance Determinants of the Long-Run Stock-Bond Correlation: The DCC-MIDAS Specification

  • Hossein Asgharian

    ()

    (Lund University)

  • Charlotte Christiansen

    ()

    (Aarhus University and CREATES)

  • Ai Jun Hou

    ()

    (Stockholm University)

We investigate the long-run stock-bond correlation using a novel model that combines the dynamic conditional correlation model with the mixed-data sampling approach. The long-run correlation is affected by both macro-finance variables (historical and forecasts) and the lagged realized correlation itself. Macro-finance variables and the lagged realized correlation are simultaneously significant in forecasting the long-run stock-bond correlation. The behavior of the long-run stock-bond correlation is very different when estimated taking the macro-finance variables into account. Supporting the flight-to-quality phenomenon for the total stock-bond correlation, the long-run correlation tends to be small/negative when the economy is weak.

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Paper provided by Department of Economics and Business Economics, Aarhus University in its series CREATES Research Papers with number 2014-13.

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Length: 36
Date of creation: 10 Apr 2014
Date of revision:
Handle: RePEc:aah:create:2014-13
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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