Working Paper: NBER ID: w9640
Authors: Roberto Rigobon; Brian Sack
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E44; E47; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-term interest rates (E43) | long-term interest rates (E43) |
| short-term interest rates (E43) | stock market prices (G10) |
| long-term interest rates (E43) | short-term interest rates (E43) |
| long-term interest rates (E43) | stock market prices (G10) |
| stock market prices (G10) | short-term interest rates (E43) |
| stock market prices (G10) | long-term interest rates (E43) |