Information and volatility linkages in the stock, bond, and money markets

We investigate the nature of volatility linkages in the stock, bond, and money markets. We develop a simple model of speculative trading that predicts strong volatility linkages in these markets due to common information, which simultaneously affects expectations across markets, and information spillover caused by cross-market hedging. To measure these linkages, we estimate a stochastic volatility representation of our trading model using GMM. The results indicate that our specification explains many of the observed characteristics of the data, and that the volatility linkages between the three markets are indeed strong. Moreover, we find that the linkages have become stronger since the 1987 stock market crash.