On Risk Premia and Volatility Transmission Across the Stock and Bond Markets
AbstractThis paper analyzes risk premia and volatility transmission across the stock and bond markets within an expected return beta representation of the conditional capital asset pricing model. Time variation in the market price of risk is characterized by a two state Markov regime switching process, while time variation in conditional betas is characterized by an asymmetric general dynamic covariance process. On the basis of estimated state dependent generalized impulse response functions, we find evidence of a flight to quality phenomenon, whereby investors shift funds from the stock market to the bond market in response to high stock market volatility. Our impulse response analysis also suggests that the degree of risk diversification achieved by cross market hedging is lowest when it is most desirable.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0508014.
Length: 26 pages
Date of creation: 30 Aug 2005
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Note: Type of Document - pdf; pages: 26
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Risk premia and volatility transmission; Stock and bond markets; Conditional capital asset pricing model;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-09 (All new papers)
- NEP-FIN-2005-11-09 (Finance)
- NEP-FMK-2005-11-09 (Financial Markets)
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