Scandinavian Working Papers in Business Administration

Working Papers,
Örebro University, School of Business

No 2021:15: Dynamic relationship between Stock and Bond returns: A GAS MIDAS copula approach

Hoang Nguyen () and Farrukh Javed ()
Additional contact information
Hoang Nguyen: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Farrukh Javed: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden

Abstract: Stock and bond are the two most crucial assets for portfolio allocation and risk management. This study proposes generalized autoregressive score mixed frequency data sampling (GAS MIDAS) copula models to analyze the dynamic dependence between stock returns and bond returns. A GAS MIDAS copula decomposes their relationship into a short-term dependence and a long-term dependence. While the long-term dependence is driven by related macro-finance factors using a MIDAS regression, the short-term effect follows a GAS process. Asymmetric dependence at different quantiles is also taken into account. We find that the proposed GAS MIDAS copula models are more effective in optimal portfolio allocation and improve the accuracy in risk management compared to other alternatives.

Keywords: GAS copulas; MIDAS; asymmetry

JEL-codes: C32; C52; C58; G11; G12

45 pages, August 30, 2021

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