Volatility linkages and spillovers in stock and bond markets: Some international evidence

Abstract

This study investigates the transmission of market-wide volatility between the equity markets and bond markets of Japan, Germany, the U.K., and the U.S. To measure the volatility transmission, the BEKK- a decomposition approach of the multivariate GARCH (1,1) model, is used to the of examine cross-market contemporaneous effect information arrival. Our results suggest that within the domestic cross markets, the volatility transmission is unidirectional from the stock market to the bond market. Evidence from international cross-market analysis is mixed, with strong evidence on volatility spillover among these international stock markets, but weak evidence between international stock and bond markets. In addition, there are significant bi-directional volatility transmissions between stock markets in Germany and the U.K., and between Germany and the U.S. The volatility transmissions among these markets suggest that the international diversification of bonds is not prevalent.