The Economic Value of Volatility Transmission between the Stock and Bond Markets

29 Pages Posted: 17 Oct 2006

See all articles by Helena Chuliá

Helena Chuliá

University of Barcelona - Faculty of Economic Science and Business Studies

Hipòlit Torró

University of Valencia

Date Written: January 2007

Abstract

The objective of this paper is to analyze volatility transmission between stocks and bonds in the European market in an attempt to establish whether the observed pattern in volatility can be exploited economically. In order to do so, firstly, we use an asymmetric multivariate GARCH model that allows for asymmetries in second moments. Secondly, we design a trading rule to dynamically allocate capital between equities and bonds. The results indicate that volatility spillovers between both assets take place in both directions. Moreover, these volatility spillovers are economically significant since trading rules based on them offer profitable returns after transaction costs. This last fact could suggest a failure of the efficient market hypothesis.

Keywords: Volatility Spillovers, GARCH, Trading Rules

JEL Classification: C32, C53, G11

Suggested Citation

Chuliá, Helena and Torró, Hipòlit, The Economic Value of Volatility Transmission between the Stock and Bond Markets (January 2007). Available at SSRN: https://ssrn.com/abstract=938150 or http://dx.doi.org/10.2139/ssrn.938150

Helena Chuliá (Contact Author)

University of Barcelona - Faculty of Economic Science and Business Studies ( email )

Barcelona
Spain

Hipòlit Torró

University of Valencia ( email )

Facultat d'Economia
Av. dels Tarongers s/n
Valencia, 46022
Spain
34-6-162 50 74 (Phone)
34-6-382 83 70 (Fax)

HOME PAGE: http://www.uv.es/torro

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