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.