Macro-economic determinants of European stock and government bond correlations: A tale of two regions

Erica Perego and Wessel Vermeulen

Journal of Empirical Finance, 2016, vol. 37, issue C, 214-232

Abstract: This paper presents an analysis of Euro-zone financial markets based on a joint assessment of bonds, stocks and stock–bond correlations between groups of Euro-zone countries. The quarterly component of dynamic correlations indicates the divergence of integration in Europe and highlights the heterogeneity in these markets. Panel regressions on these dynamic correlations, controlling for unobserved heterogeneity, offer new insights into the role of macro-economic determinants of financial markets between assets and regions. This combined analysis of markets provides evidence on the importance of macro-economic factors such as inflation, uncertainty, debt, current account and economic growth in European financial integration. These factors may be overlooked when analysing a single market for individual pairs of countries. As a result we find that the robust role of economic fundamentals in European financial market correlations points to the need for European economic integration based on sound macro-economic fundamentals for both current and future Euro-zone members.

Keywords: Currency union; Financial markets; Time-varying correlation (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (22)

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Working Paper: Macroeconomic determinants of European stock and government bond correlations: A tale of two regions (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:37:y:2016:i:c:p:214-232

DOI: 10.1016/j.jempfin.2016.04.002

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