Equity volatility, bond yields, and yield spreads

Abstract

This study examines the impact of implied and contemporaneous equity market volatility on Treasury yields, corporate bond yields, and yield spreads over Treasuries. The CBOE VIX is the measure of implied volatility, and the measure of contemporaneous volatility is constructed using intraday squared S&P 500 returns. We find that bond yields and spreads respond to changes in equity market volatility in a manner consistent with a flight-to-quality effect. Both shortand long-term Treasury yields fall in response to increases in implied volatility, and the yield curve flattens modestly. Yields on short-term investment grade bonds fall in response to contemporaneous volatility shocks, while long-term spreads on low-quality issues widen. This indicates that investors "look ahead" in anticipation of changes in equity market volatility but respond more strongly to changes in contemporaneous market activity.

Does Bitcoin hedge global uncertainty? Evidence from wavelet-based quantile-in-quantile regressions

“…The second strand is research focusing explicitly on uncertainty and its relation to conventional assets such as stocks and bonds and to commodities. For example, Jubinski and Lipton (2012) show that the negative association between the VIX and yields on treasury and investment-grade bonds is in line with the flight-to-safety effect, confirming the view of Thomas (2015).…”

“…Notably, an increase in the VIX generally results in 'flights to safety' (Thomas, 2015). For example, Jubinski and Lipton (2012) highlight the negative correlation between the VIX and treasury and investment grade bond yields. This means that yields fall in response to increases in implied volatility, suggesting that bond price increases as equity decreases.…”

“…Interestingly, there is sufficient evidence to suggest that the implied volatility index, such as the US VIX, is negatively correlated with equities (e.g. Jubinski and Lipton, 2012). The VIX is a key market risk indicator that reflects market sentiment and investor expectation.…”

The Dynamic Correlation between ASEAN-5 Stock Markets and World Oil Prices

“…Whereas for the stock markets in Egypt, Oman, Saudi Arabia, and Kuwait, Abdelaziz, Chortareas, & Cipollini (2008) discovered a relationship of oil with the capital markets. For the US capital markets, Jubinski & Lipton (2013) concluded that the world oil price change gives significant effect on S&P500 Index return. Is the ASEAN region, Hersugondo et al (2015) conducted a research on the effect of the change of world oil price to the stock market return in several countries in ASEAN region.…”

Equity Risk as a Determinant of Future Term-Structure Volatility

“…Fleming, Kirby, and Ostdiek (1998) and Kodres and Pritsker (2002) suggest cross-asset-class effects tied to hedging and portfolio rebalancing. Pricing effects linking the stock and bond markets have been attributed to flight-toquality/flight-from-quality (FTQ/FFQ), where some investors (presumably) switch between riskier stocks and safer Treasuries as risk perceptions change Sun, 2005, 2007;Underwood, 2009;Baele, Bekaert, and Inghelbrecht, 2010;BenRaphael, Kandel, and Wohl, 2012;Jubinski and Lipton, 2012;Bansal, Connolly, and Stivers, 2014). 3 Chordia, Sarkar, and Subrahmanyam (2005) find that innovations to stock volatility forecast an increase in bond bid-ask spreads.…”