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

Lookup NU author(s): Dr Wessel Vermeulen



This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND).


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.

Publication metadata

Author(s): Perego ER, Vermeulen WN

Publication type: Article

Publication status: Published

Journal: Journal of Empirical Finance

Year: 2016

Volume: 37

Pages: 214-232

Print publication date: 01/06/2016

Online publication date: 20/04/2016

Acceptance date: 16/04/2016

Date deposited: 13/03/2017

ISSN (print): 0927-5398

Publisher: Elsevier BV


DOI: 10.1016/j.jempfin.2016.04.002


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