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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Spillovers Across U.S. Financial Markets
Roberto Rigobon and Brian Sack

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.

Keywords: Identification, heteroskedasticity, GARCH, stock market, yield curve

Full paper (488 KB PDF)

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Last update: April 24, 2003