In search of the determinants of European asset market comovements

- We study the comovement of stock and sovereign bond markets of the Euro Area.
- We use a DDC model to measure the covariances between returns.
- We use a new approach to measure risk factors based on Google search data.
- These correlate with economic indicators and are available at a weekly frequency.
- The factors explain 55% (35%) of the covariances between stocks (sovereign bonds).

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.