Stock-bond return correlations: Moving away from “one-frequency-fits-all” by extending the DCC-MIDAS approach

Anne-Florence Allard, Leonardo Iania, Kristien Smedts

Research output: Contribution to journalArticle (Academic Journal)

Abstract

This paper explores the determinants of U.S. stock-bond correlations estimated at various frequencies. For this purpose, the two-component DCC-MIDAS model of correlation (Colacito et al., 2011) is used and extended to incorporate a third correlation frequency component. Subsequently, macroeconomic and financial variables are studied as determinants of each component. We show that the daily correlation component is driven by financial market factors, while the monthly component is more influenced by macroeconomic factors. Finally, the yearly component is determined by funding opportunities in the economy. These results are important as they show that different correlation components and determinants should be considered for different investment horizons.
Original languageEnglish
Article number101557
Number of pages12
JournalInternational Review of Financial Analysis
Volume71
Early online date15 Jul 2020
DOIs
Publication statusPublished - 1 Oct 2020

Keywords

  • stock-bond correlation
  • frequency-variation
  • macroeconomic factors
  • financial factors
  • DCC-MIDAS model

Cite this