Title: On the economic determinants of optimal stock-bond portfolios: International evidence
Authors: Christian Conrad - Heidelberg University (Germany) [presenting]
Abstract: Using a modified DCC-MIDAS specification that allows the long-term correlation component to be a function of multiple explanatory variables, the stock-bond correlation in the US, the UK, Germany, France, and Italy is shown to be 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.