Information and volatility linkages between European bond, equity and money market futures

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Volume Title

School of Business | Master's thesis

Authors

Date

2013

Department

Department of Finance
Rahoituksen laitos

Major/Subject

Finance
Rahoitus

Mcode

Degree programme

Language

en

Pages

66

Series

Abstract

The objective of this thesis is to study the information and volatility linkages between European bond, stock and money market futures contracts. In particular, the thesis investigates the information transmission between the futures contracts measured through volatility spillover. Moreover, it examines the volatility correlation between the futures series and whether the volatility correlation changes over time. Furthermore, the study tests whether a volatility model, which incorporates cross-market volatility spillover, generates better volatility estimates. The dataset includes 3955 daily price observations of Euro Bund, DJ Euro Stoxx 50 Index and Euro Schatz futures contracts from March, 1997 to September, 2012. Five testable hypotheses are stated and multivariate GARCH volatility models are used to estimate the volatility correlations between the futures markets and to detect volatility spillovers from one market to another. The empirical results of the thesis show that the volatilities between the bond, stock and money market futures contracts are correlated. Furthermore, the analysis reveals unidirectional volatility spillover from the European bond and money market to the stock market. Moreover, the results indicate that the multivariate GARCH model which allows cross-market volatility spillover is able to capture the causal relationships in volatility. Instead, the volatility estimates generated with the multivariate GARCH model provide only moderate improvement to the estimates generated with the standard GARCH model. Further, the results show that volatilities and the correlation between volatilities are time varying and the volatility spillover between the markets may change over time.

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Keywords

volatility, volatility spillover, information transmission, GARCH

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Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-201306267064

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[gradu] Kauppakorkeakoulu / BIZ