Modeling the joint dynamics of risk-neutral stock index and bond yield volatilities

Yinggang Zhou

Journal of Banking & Finance, 2014, vol. 38, issue C, 216-228

Abstract: This 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.

Keywords: Option-implied volatility; VIX; MOVE; Common information; Information spillover; Regime switch (search for similar items in EconPapers)
JEL-codes: C32 G11 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:38:y:2014:i:c:p:216-228

DOI: 10.1016/j.jbankfin.2013.10.010

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