Abstract
We investigate the time-varying long-term correlation of U.S. stock and bond markets, as influenced by an economic policy uncertainty (EPU) index based on the modified DCC-MIDAS model. Considering the structural breakpoints of the 1997 Asian financial crisis and the 2008 financial crisis, we extend the model by incorporating dummy variables to adjust the long-term correlation during different periods. The empirical results show that the modified model is more efficient than the baseline model. Moreover, consistent with the flight-to-quality phenomenon, we further find that EPU has a significant negative influence on long-term stock-bond correlation.
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