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

Conrad, Christian ; Stuermer, Karin

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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.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0636
Place of Publication: Heidelberg
Date Deposited: 14 Jul 2017 10:42
Date: 14 July 2017
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Controlled Keywords: stock-bond correlation, DCC, DCC-MIDAS, survey data, macro expectations, forecasting, portfolio choice, asset allocation
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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