Macro-Finance Determinants of the Long-Run Stock-Bond Correlation: The DCC-MIDAS Specification
38 Pages Posted: 12 Apr 2014 Last revised: 4 Nov 2015
Date Written: November 4, 2015
We investigate long-run stock-bond correlation using a model that combines the dynamic conditional correlation model with the mixed-data sampling approach and allows long-run correlation to be affected by macro-finance factors (historical and forecasts). We use macro-finance factors related to inflation and interest rates, illiquidity, state of the economy, and market uncertainty. Macro-finance factors, particularly their forecasts, are good at forecasting long-run stock-bond correlation. Supporting the flight-to-quality phenomenon, long-run correlation tends to be small and negative when the economy is weak.
Keywords: DCC-MIDAS model; Long-run correlation; Macro-finance variables; Stock-bond correlation
JEL Classification: C32; C58; E32; E44; G11; G12
Suggested Citation: Suggested Citation