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Decomposing European bond and equity volatility

The paper investigates volatility spillover from US and aggregate European asset markets into European national asset markets. A main contribution is that bond and equity volatilities are analyzed simultaneously. A new model belonging to the 'volatilityspillover' family is suggested: The conditional variance of e.g. the unexpected German stock return is divided into separate effects from the contemporaneous idiosyncratic variance of US bonds, US stocks, European bonds, European stocks, German bonds, and German stocks. Significant volatility-spillover effects are found. The national bond (stock) volatilities are mainly influenced by bond (stock) effects. Global, regional, and local volatility effects are all important. The introduction of the euro is associated with a structural break.

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Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Research Group Working Papers with number F-2004-01.

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Length: 41 pages
Date of creation: 20 Sep 2005
Date of revision:
Handle: RePEc:hhb:aarbfi:2004-01
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The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark

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Web page: http://www.asb.dk/about/departments/bs.aspx

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