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Volatility Spillovers between Interest Rates and Equity Markets of Developed Economies: A Note

Author

Listed:
  • Wilson Donzwa

    (University of Pretoria, Pretoria, South Africa)

  • Rangan Gupta

    (University of Pretoria, Pretoria, South Africa)

  • Mark E. Wohar

    (College of Business Administration, University of Nebraska at Omaha, Omaha, USA and School of Business and Economics, Loughborough University, Leicestershire, UK)

Abstract

This study employs the recently developed Lagrange multiplier-based causality-in-variance test by Hafner and Herwartz (2006), to determine the volatility spillovers between interest rates and stock returns for the US, Euro Area, UK and Japan. The investigation pays careful attention to volatility transmissions between stock returns and interest rates before and after these economies reached the Zero Lower Bound (ZLB), which is permitted via the use of Shadow Short Rates (SSR), used as a proxy for monetary policy decisions. The results based on daily data, imply that while bi-directional causality is observed, the volatility spillover from interest rates to stock markets are more prominent for the full-sample, as well as the sub-samples cover the pre- and during-ZLB periods. In addition, the relationship between the volatility spillovers, based on a Grey correlation analysis, was found to be consistently positive over time.

Suggested Citation

  • Wilson Donzwa & Rangan Gupta & Mark E. Wohar, 2017. "Volatility Spillovers between Interest Rates and Equity Markets of Developed Economies: A Note," Working Papers 201764, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201764
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    References listed on IDEAS

    as
    1. Cheung, Yin-Wong & Ng, Lilian K., 1996. "A causality-in-variance test and its application to financial market prices," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 33-48.
    2. Chuliá, Helena & Gupta, Rangan & Uribe, Jorge M. & Wohar, Mark E., 2017. "Impact of US uncertainties on emerging and mature markets: Evidence from a quantile-vector autoregressive approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 178-191.
    3. Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, August.
    4. Milan Damjanović & Igor Masten, 2016. "Shadow short rate and monetary policy in the Euro area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 279-298, May.
    5. Hafner, Christian M. & Herwartz, Helmut, 2006. "A Lagrange multiplier test for causality in variance," Economics Letters, Elsevier, vol. 93(1), pages 137-141, October.
    6. Hong, Yongmiao, 2001. "A test for volatility spillover with application to exchange rates," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 183-224, July.
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    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G1 - Financial Economics - - General Financial Markets

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