Equity Volatility Bond Yields and Yield Spreads Essay

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EQUITY VOLATILITY, BOND YIELDS, AND YIELD SPREADS DANIEL JUBINSKI* AMY F. LIPTON 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. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:480 –503, 2012 INTRODUCTION This study examines the question of whether bond yields and spreads over the corresponding Treasury security are systematically affected by equity market The authors thank an anonymous referee for many helpful comments and suggestions. Research support was provided by St. Joseph’s University. Any remaining errors are, of course, the authors’ own. *Correspondence author, Department of Finance, St. Joseph’s University, Mandeville Hall 340, 5600 City Avenue, Philadelphia, PA 19131. Tel: (610) 660-3449, Fax: (610) 660-1986, e-mail: dan.jubinski@ sju.edu Received July 2010; Accepted February 2011 ■ Daniel Jubinski and Amy F. Lipton are in the Department of Finance, St. Joseph’s University, Philadelphia, Pennsylvania. The Journal of Futures Markets, Vol. 32, No. 5, 480–503 (2012) © 2011 Wiley Periodicals, Inc.

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