Volatility Linkages of the Equity, Bond and Money Markets: An Implied Volatility Approach

Abstract:     
This study proposes an alternative approach for examining volatility linkages between S&P 500, Eurodollar futures and 30-year Treasury bond futures markets using implied volatility from the three markets. Simple correlation analysis between implied volatilities in the three markets is used to assess market correlations. Spurious correlation effect is considered and controlled for. We found that correlations between implied volatilities in the equity, money and bond markets are positive, strong and robust. We replicated the approach of Fleming, Kirby and Ostdiek (1998) to check the substitutability of the implied volatility approach and found that the results are nearly identical and concluded that our approach is simple and robust to implement in practice. We also argue that finding from this paper provides supportive evidence on the information content of the implied volatilities in the equity, bond and money markets.

Number of Pages in PDF File: 25

Keywords: Volatility Linkage, Information Linkage, Implied Volatility, Spurious Regression, GMM

JEL Classification: G12;G14

working papers series