- July 2016
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- 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.
- stock and bond comovements; affine general equilibrium models; eurozone crisis; google trends; portfolio weights modeling