The purpose of this paper is to investigate volatility spillovers across the interest rate swap markets of the G7 economies, and then the authors investigate whether spillovers of swap markets contain useful information to explain subsequent stock price movements.
This study uses the short- and long-term swap spread volatility of the G7 countries to explore the spillover effects of international swap markets, and then investigates the relationship between swap and stock markets. The authors use the generalized VAR approach suggested by Diebold and Yilmaz (2012) to study spillovers of international swap markets. The Granger-causality tests are employed to examine the linkage of interest rate swap and stock markets.
This paper shows that a moderate spillover effect exists for the short- and long-term swap markets. Moreover, the results show that the short- and long-term swap markets of France and Germany have a larger impact on other countries’ swap markets than that of other countries’ swap markets on the French and German swap markets. Finally, the results indicate that the total volatility spillovers for the long-term swap markets have a larger influence on the total volatility spillover index of stock markets and the global stock market volatility than that of the short-term swap markets.
Prior literature has used impulse response and variance decomposition analyses to investigate international swap markets linkages. However, the results depend on the ordering of variables. This study uses the framework of Diebold and Yilmaz (2012) to overcome the ordering issue, and thus the authors can compute directional spillovers. This paper is the first study to explore the linkage of the total volatility spillover of swap markets and the stock markets.
The author is grateful to Don Johnson (the Editor) and two anonymous referees. Their helpful comments and suggestions have substantially improved this paper.
Lee, H., Hsu, C. and Chien, C. (2016), "Spillovers of international interest rate swap markets and stock market volatility", Managerial Finance, Vol. 42 No. 10, pp. 943-962. https://doi.org/10.1108/MF-08-2015-0221Download as .RIS
Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited