Decomposing European bond and equity volatility†

The paper investigates volatility spillover from US and aggregate European asset markets into European national asset markets. A main contribution is that bond and equity volatility spillover is analysed simultaneously. A new model belonging to the ‘volatility-spillover’ class is suggested: The conditional variance of e.g. the unexpected German stock return is divided into separate effects from US bonds, US stocks, European bonds, European stocks, German bonds, and German stocks. Significant volatility-spillover effects are found. The national bond (stock) volatilities are mainly influenced by bond (stock) effects. After the introduction of the euro the European markets have become more integrated; bond markets more so than stock markets. Copyright © 2008 John Wiley & Sons, Ltd.