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Time-varying correlations and Sharpe ratios during quantitative easing

  • Paul M. Jones EMAIL logo and Haley O’Steen
Published/Copyright: November 23, 2017

Abstract

Using an econometric methodology from [Cappiello, Lorenzo, Robert F. Engle, and Kevin Sheppard. 2006. “Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns.” Journal of Financial Econometrics 4 (4): 537–572.], we evaluate time-varying correlations between multiple asset classes using an asymmetric-DCC GARCH model. Specifically, we focus on the changes in these correlations during quantitative easing. We then use these conditional correlations, along with conditional means and variances to find optimal investment portfolios using Markowitz mean-variance minimization. Lastly, we compute time-varying Sharpe ratios. Our results show increasing Sharpe ratios during the period of quantitative easing which suggests that the Federal Reserve’s programs were successful in increasing returns and minimizing risk – i.e. volatility – across several asset classes during the financial crisis.

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Supplemental Material

The online version of this article offers supplementary material (DOI: https://doi.org/10.1515/snde-2016-0083).


Received: 2016-7-10
Accepted: 2017-10-7
Published Online: 2017-11-23

©2018 Walter de Gruyter GmbH, Berlin/Boston

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