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

Author

Listed:
  • Asgharian, Hossein

    (Department of Economics, Lund University)

  • Christiansen, Charlotte

    (CREATES, Aarhus University)

  • Hou, Ai Jun

    (School of Business, Stockholm University)

Abstract

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.

Suggested Citation

  • Asgharian, Hossein & Christiansen, Charlotte & Hou, Ai Jun, 2014. "Macro-Finance Determinants of the Long-Run Stock-Bond Correlation: The DCC-MIDAS Specification," Working Papers 2014:37, Lund University, Department of Economics.
  • Handle: RePEc:hhs:lunewp:2014_037
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    More about this item

    Keywords

    DCC-MIDAS model; Long-run correlation; Macro-finance variables; Stock-bond correlation;
    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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