On the economic determinants of optimal stock-bond portfolios: International evidence

Arbeitspapier

Using a modified DCC-MIDAS specification that allows the long-term correlation component to be a function of multiple explanatory variables, we show that the stock-bond correlation in the US, the UK, Germany, France, and Italy is mainly driven by inflation and interest rate expectations as well as a flight-to-safety during times of stress in financial markets. Based on the new DCC-MIDAS model, we construct stock-bond hedge portfolios and show that these portfolios outperform various benchmark portfolios in terms of portfolio risk. While optimal daily weights minimize portfolio risk, we find that portfolio turnover and trading costs can be substantially reduced when switching to optimal monthly weights.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper Series ; No. 636

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Financial Econometrics ; Financial Markets and the Macroeconomy ; Monetary Policy ; Portfolio Choice; Investment Decisions ; International Financial Markets ; Financial Forecasting and Simulation
• Subject: Stock-bond correlation ; DCC ; DCC-MIDAS ; survey data ; macro expectations ; forecasting ; portfolio choice ; asset allocation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Conrad, Christian ; Stürmer, Karin
• Event: Veröffentlichung
• (who): University of Heidelberg, Department of Economics
• (where): Heidelberg
• (when): 2017

Further information

• DOI: doi:10.11588/heidok.00023231
• Handle: http://hdl.handle.net/10419/179276
• URN: urn:nbn:de:bsz:16-heidok-232315
• Last update: 10.03.2025, 11:41 AM CET