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Spillover dynamics effects between risk-neutral equity and Treasury volatilities

Ana González-Urteaga (), Belén Nieto () and Gonzalo Rubio ()
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Ana González-Urteaga: Universidad Pública de Navarra and Institute for Advanced Research in Business and Economics, INARBE
Belén Nieto: Universidad de Alicante
Gonzalo Rubio: Universidad CEU Cardenal Herrera

SERIEs: Journal of the Spanish Economic Association, 2022, vol. 13, issue 4, No 3, 663-708

Abstract: Abstract Macro-finance asset pricing models provide a rationale for connectedness dynamics between equity and Treasury risk-neutral volatilities. In this paper, we study the total and directional connectedness, in the sense of spillover effects, between risk-neutral volatilities from the equity and Treasury markets. In addition, we analyze the economic and monetary drivers of connectedness dynamics. Most of the time, but especially during bad economic times, we find significant net spillovers from Treasury to equity risk-neutral volatility. The spillover channel between risk-neutral volatilities arises mainly through the government fixed income market.

Keywords: Risk-neutral equity volatility; Risk-neutral Treasury volatility; Total connectedness; Directional connectedness; Real and monetary economic drivers (search for similar items in EconPapers)
JEL-codes: C32 E32 G12 G13 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s13209-022-00264-w

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