Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/179276
Authors: 
Conrad, Christian
Stürmer, Karin
Year of Publication: 
2017
Series/Report no.: 
Discussion Paper Series 636
Abstract: 
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.
Subjects: 
Stock-bond correlation
DCC
DCC-MIDAS
survey data
macro expectations
forecasting
portfolio choice
asset allocation
JEL: 
C32
C58
E44
E52
G11
G15
G17
Persistent Identifier of the first edition: 
Document Type: 
Working Paper
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