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Spillovers across U.S. financial markets

Author

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  • Roberto Rigobon
  • Brian P. Sack

Abstract

Movements in the prices of different assets are likely to directly influence one another. This paper identifies the contemporaneous interactions between asset prices in U.S. financial markets by relying on the heteroskedasticity in their movements. In particular, we estimate a "structural-form GARCH" model that includes the short-term interest rate, the long-term interest rate, and the stock market. The results indicate that there are strong contemporaneous interactions between these variables. Accounting for this behavior is critical for interpreting daily changes in asset prices and for predicting the future paths of their variances and correlations. We demonstrate the importance of this consideration in a risk-management application.

Suggested Citation

  • Roberto Rigobon & Brian P. Sack, 2003. "Spillovers across U.S. financial markets," Finance and Economics Discussion Series 2003-13, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2003-13
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    Keywords

    Financial markets ; Asset pricing;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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