Equity volatility as a determinant of future term-structure volatility

Naresh Bansal, Robert Connolly and Chris Stivers

Journal of Financial Markets, 2015, vol. 25, issue C, 33-51

Abstract: We show that equity volatility serves as a determinant of future Treasury term-structure volatility over the recent October 1997 to June 2013 period. We find that equity volatility contains incrementally reliable information for the subsequent volatility of: (1) 10-year and 30-year bond futures returns, (2) the term-structure׳s level, and (3) the term-structure׳s slope. We present additional evidence that suggests a flight-to-quality/flight-from-quality pricing avenue is a likely contributor to the volatility linkages, where time-varying economic uncertainty can generate both a large positive serial correlation in stock volatility and a time-variation in the precautionary savings motive and diversification benefits of holding bonds.

Keywords: Equity risk; Term structure; Bond volatility (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:25:y:2015:i:c:p:33-51

DOI: 10.1016/j.finmar.2015.05.002

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