Decomposing European bond and equity volatility

Abstract

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.European Asset Markets; GARCH; International Finance; Volatility Spillover