Volatility Linkages across Equity, Money and Bond Markets: An Implied Volatility Approach
27 Pages Posted: 3 Mar 2008
Date Written: June 2008
Abstract
This study proposes a simple way for examining volatility linkages between S&P 500, Eurodollar futures and 30-year Treasury bond futures markets using implied volatility. Four-year Correlation between daily implied volatilities in the three markets is used to assess market linkages. Measurement biases and spurious correlation effect are considered and controlled for. It is found that there is relatively high and robust correlation between the equity and money markets, but that the linkages between the other market pairs are weak and spurious. We replicated the approach of Fleming, Kirby and Ostdiek (1998) and find that the results are nearly identical and conclude that our approach is simpler and robust to implement.
Keywords: Market Volatility Linkage, Implied Volatility, Spurious Regression, GMM
JEL Classification: G12, G14
Suggested Citation: Suggested Citation