In search of the determinants of European asset market comovements Articles uri icon

authors

  • BATISTA MAIA GOMES, PEDRO
  • TAAMOUTI, ABDERRAHIM

publication date

  • July 2016

start page

  • 103

end page

  • 117

volume

  • 44

International Standard Serial Number (ISSN)

  • 1059-0560

Electronic International Standard Serial Number (EISSN)

  • 1873-8036

abstract

  • We show, in a broad class of affine general equilibrium models with long-run risk, that the covariances between asset returns are linear functions of risk factors. We use a dynamic conditional correlation model to measure the covariances of stock and sovereign bond markets in the Euro Area. We use a new approach to measure risk factors based on Google search data. The factors explain 50 to 60% of the variation of the covariances between European stocks and 25 to 35% of the covariances between European bonds. The information improves the portfolio performance compared to an equally weighted portfolio. (C) 2016, Elsevier Inc. All rights reserved.

subjects

  • Economics

keywords

  • stock and bond comovements; affine general equilibrium models; eurozone crisis; google trends; portfolio weights modeling