Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2014:37: Macro-Finance Determinants of the Long-Run Stock-Bond Correlation: The DCC-MIDAS Specification

Hossein Asgharian (hossein.asgharian@nek.lu.se), Charlotte Christiansen (cchristiansen@creates.au.dk) and Ai Jun Hou (ajh@fek.su.se)
Additional contact information
Hossein Asgharian: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Charlotte Christiansen: CREATES, Aarhus University, Postal: Department of Economics and Business, School of Business and Social Sciences, Aarhus University, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Ai Jun Hou: School of Business, Stockholm University, Postal: School of Business, Stockholm University, Sweden

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.

Keywords: DCC-MIDAS model; Long-run correlation; Macro-finance variables; Stock-bond correlation

JEL-codes: C32; C58; E32; E44; G11; G12

40 pages, November 20, 2014

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