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

See all articles by Hossein Asgharian

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies

Charlotte Christiansen

Aarhus University - CREATES

Ai Jun Hou

Stockholm University

Date Written: November 4, 2015

Abstract

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

Asgharian, Hossein and Christiansen, Charlotte and Hou, Ai Jun, Macro-Finance Determinants of the Long-Run Stock-Bond Correlation: The DCC-MIDAS Specification (November 4, 2015). Available at SSRN: https://ssrn.com/abstract=2423361 or http://dx.doi.org/10.2139/ssrn.2423361

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies ( email )

P.O. Box 7082
S-220 07 Lund
Sweden
046-222-86-87 (Phone)

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Ai Jun Hou

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

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