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

Anne-Florence Allard; Leonardo Iania; Kristien Smedts

doi:10.1016/j.irfa.2020.101557

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

Anne-Florence Allard, Leonardo Iania, Kristien Smedts

School of Accounting and Finance - Business School

Research output: Contribution to journal › Article (Academic Journal) › peer-review

18 Citations (Scopus)

163 Downloads (Pure)

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 language	English
Article number	101557
Number of pages	12
Journal	International Review of Financial Analysis
Volume	71
Early online date	15 Jul 2020
DOIs	https://doi.org/10.1016/j.irfa.2020.101557
Publication status	Published - 1 Oct 2020

Research Groups and Themes

AF Financial Markets

Keywords

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

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10.1016/j.irfa.2020.101557

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This is the author accepted manuscript (AAM). The final published version (version of record) is available online via Elsevier at https://www.sciencedirect.com/science/article/pii/S1057521920302015#! . Please refer to any applicable terms of use of the publisher.
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title = "Stock-bond return correlations: Moving away from “one-frequency-fits-all” by extending the DCC-MIDAS approach",

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.",

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AU - Smedts, Kristien

PY - 2020/10/1

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N2 - 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.

AB - 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.

KW - stock-bond correlation

KW - frequency-variation

KW - macroeconomic factors

KW - financial factors

KW - DCC-MIDAS model

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DO - 10.1016/j.irfa.2020.101557

M3 - Article (Academic Journal)

SN - 1057-5219

VL - 71

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

M1 - 101557

ER -

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

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Keywords

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