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On the Economic fundamentals behind the Dynamic Equicorrelations among Asset classes: Global evidence from Equities, Real estate, and Commodities

M. Karanasos and S. Yfanti

Journal of International Financial Markets, Institutions and Money, 2021, vol. 74, issue C

Abstract: We reveal the macroeconomic determinants of the dynamic correlations between three global asset markets: equities, real estate, and commodities. Conditional equicorrelations, computed by the GJR-GARCH-DECO model, are explained by the macro-financial proxies of economic policy and financial uncertainty, credit conditions, economic activity, business and consumer confidence, and geopolitical risk. Our results suggest that elevated cross-asset correlations are associated with higher uncertainty, tighter credit conditions, and lower geopolitical risk, while lower correlations are related to stronger economic activity, business, and consumer confidence. We further focus on economic policy uncertainty (EPU) as a potent catalyst of the asset markets integration process and conclude that EPU magnifies all macro-effects across all correlations. Lastly, we investigate the global financial crisis effect on the time-varying impact of the correlations’ macro-drivers. The crisis structural break amplifies the influence that all determinants exert on the evolution of correlations apart from the geopolitical risk upshot, which is alleviated after the crisis advent.

Keywords: Commodities; Cross-asset dynamic equicorrelations; Economic policy uncertainty; Global equities; Macro-financial linkages; REITs (search for similar items in EconPapers)
JEL-codes: C32 C58 D80 E44 G01 G15 Q02 R33 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.intfin.2021.101292

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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