ABSTRACT:This study implies the causality-in-variance test newly developed by Hafner and Herwartz (2006) to investigate the volatility spillovers between domestic equity and bond markets in the G7 and BRICS countries. The empirical result shows that there is ethier unidirectional or bidirectional spillover effect in every developed market and weak evidence for Russia in both directions. In details, there is bidirectional volatility spillovers between the equity and bond markets in France, Brazil and South Africa, and unidirectional spillovers from the bond to the equity in the US, UK and Germany at 1% level of significance. However, no rigorous conclusions could be drawn by the LMGARCH model in the case of Japan, Italy, Canada, India and China. This has important implications for domestic cross-market portfolio allocation and risk management in both developed and emerging markets.

JELClassification:C12, C32, G12, G15

Keywords:volatility spillover, equity market, bond market, causality-in-varince, LM-GARCH

Romanian Journal of Economic Forecasting - XVI (4) 2013