The economic value of volatility transmission between the stock and bond markets

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Abstract

This study has two main objectives. Firstly, volatility transmission between stocks and bonds in European markets is studied using the two most important financial assets in these fields: the DJ Euro Stoxx 50 index futures contract and the Euro Bund futures contract. Secondly, a trading rule for the major European futures contracts is designed. This rule can be applied to different markets and assets to analyze the economic significance of volatility spillovers observed between them. The results indicate that volatility spillovers take place in both directions and that the stock-bond trading rule offers very profitable returns after transaction costs. These results have important implications for portfolio management and asset allocation. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1066–1094, 2008

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