Modeling the joint dynamics of risk-neutral stock index and bond yield volatilities
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AbstractThis study examines the joint evolution of risk-neutral stock index and bond yield volatilities by using the Chicago Board Option Exchange S&P500 volatility index (VIX) and the Bank of America Merrill Lynch Treasury Option Volatility Estimate Index (MOVE). I use bivariate regime-switching models to investigate the alternation of "high-risk" and "low-risk" markets, where the high-risk regime is characterized by higher and more volatilities with weaker cross-market linkages. Common information about economic and financial conditions appears to drive VIX and MOVE fluctuations between the two risk regimes. Two-regime specifications also distinguish between information spillover and common information effects. Ignoring regime shifts leads to spurious extreme persistence and incomplete inferences about asymmetric volatility. The findings carry important implications for asset allocation. (C) 2013 Elsevier B.V. All rights reserved.
All Author(s) ListZhou YG
Journal nameJournal of Banking and Finance
Volume Number38
Pages216 - 228
LanguagesEnglish-United Kingdom
KeywordsCommon information; Information spillover; MOVE; Option-implied volatility; Regime switch; VIX
Web of Science Subject CategoriesBusiness & Economics; Business, Finance; BUSINESS, FINANCE; Economics; ECONOMICS

Last updated on 2020-02-08 at 01:41