Volatility Linkages in the Finnish Stock, Bond, and Money Markets

Abstract

This paper uses weekly data for the period January 9, 1991 to December 30, 2003 to assert the strength of volatility linkages between Finnish stock, bond, and money markets. We use both generalized method of moments and a vector-autoregressive EGARCH specification. The volatility linkages for the stock-bond, and stock-money market pairings are surprisingly low, even negative, and weaker than the return correlations. Logically, the bond-money market pairing exhibit a strong, yet not perfect volatility link. Stock market has the most 'independent' volatility, influencing both the bond volatility, and the money market volatility. Then again, money market volatility is negatively affected both by the stock market, and the bond market component. The leverage hypothesis for asymmetric volatility is contradicted by significant asymmetry parameters both for the stock market, and the money market. The return correlations between the stock market and the other markets have decreased over time. We conclude that the asset allocation, risk management, and regulatory need for considering linkages beyond return correlations is fairly weak.