NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Spillovers Across U.S. Financial Markets

Roberto Rigobon, Brian Sack

NBER Working Paper No. 9640
Issued in April 2003
NBER Program(s):   AP

Movements in the prices of different assets are likely to directly influence one another. This paper develops a model that 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.

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Document Object Identifier (DOI): 10.3386/w9640

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