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

Research output: Contribution to journalArticle

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.

Details

Authors
Organisations
External organisations
  • Aarhus University
  • Stockholm University
Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics

Keywords

  • DCC-MIDAS model, Long-run correlation, Macro-finance factors, Stock–bond correlation
Original languageEnglish
Pages (from-to)617–642
JournalJournal of Financial Econometrics
Volume14
Issue number3
Publication statusPublished - 2016
Publication categoryResearch
Peer-reviewedYes