Volatility Spillovers between Stock and Bond Returns: Evidence from Nordic Countries

Abstract: This paper uses a bivariate BEKK model to estimate volatility spillover effects between stock and bond markets for the Nordic countries Sweden, Denmark, Finland and Norway. Daily log returns between the years 2001 and 2018 are analyzed. No spillover effect from the bond to the stock market is found in any of the countries which is a result that is unusual compared to a large part of the preexisting literature. Regarding spillover effects from the stock market to the bond market, significant effects are found in Sweden, Denmark and Finland but not in Norway. Volatility Impulse Response Functions (VIRFs) are computed to present the results more intuitively. The VIRFs describe the effects on stock and bond markets after being hit by a shock which originates from either of the markets. The main conclusions drawn from the VIRFs are that a shock originating from the stock market has a persistent effect on bond market volatilities and that stock market to bond market volatility spillovers are higher when the financial markets are more unstable.