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On Risk Premia and Volatility Transmission Across the Stock and Bond Markets

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  • Francis Vitek

    (University of British Columbia)

Abstract

This paper analyzes risk premia and volatility transmission across the stock and bond markets within an expected return beta representation of the conditional capital asset pricing model. Time variation in the market price of risk is characterized by a two state Markov regime switching process, while time variation in conditional betas is characterized by an asymmetric general dynamic covariance process. On the basis of estimated state dependent generalized impulse response functions, we find evidence of a flight to quality phenomenon, whereby investors shift funds from the stock market to the bond market in response to high stock market volatility. Our impulse response analysis also suggests that the degree of risk diversification achieved by cross market hedging is lowest when it is most desirable.

Suggested Citation

  • Francis Vitek, 2005. "On Risk Premia and Volatility Transmission Across the Stock and Bond Markets," Finance 0508014, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0508014
    Note: Type of Document - pdf; pages: 26
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Risk premia and volatility transmission; Stock and bond markets; Conditional capital asset pricing model;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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