Keywords: Identification, heteroskedasticity, GARCH, stock market, yield curve
Abstract: Movements in the prices of different assets are likely to directly influence one another.
This paper identifies the contemporaneous interactions between asset prices in U.S.
financial markets by relying on the heteroskedasticity in their movements. In particular,
we estimate a "structural-form GARCH" model that includes the short-term interest rate,
the long-term interest rate, and the stock market. The results indicate that there are
strong contemporaneous interactions between these variables. Accounting for this behavior
is critical for interpreting daily changes in asset prices and for predicting the future
paths of their variances and correlations. We demonstrate the importance of this
consideration in a risk-management application.
Full paper (488 KB PDF)
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Last update: April 24, 2003