Volatility and Information Linkages Across Markets and Countries

Abstract

This study examines information and volatility linkages across the equity, money and bond markets within Australia and the US and across the two countries. The sources of these volatility linkages are common information and information spillovers caused by cross-market hedging. We employ a rational expectations framework in which information arrives randomly causing volatility to be stochastic. The model imposes restrictions on the moments of returns which are estimated using GMM. We find that the model fits extremely well. The parameters are very stable across the various bivariate specifications. Further, cross-market linkages estimated using GMM are much stronger than those predicted using traditional proxies for volatility.