Foreign Shocks on Chilean Financial Markets: Spillovers and Comovements Between Bond and Equity Markets

Abstract:

The domestic impact of external shocks will depend on the degree of coupling of domestic assets to foreign markets, but also on the spillovers among assets. The covariance between different types of assets could be affected by new information. Changes in the covariance, for example, could come from a stronger rebalancing between stocks and bonds. Therefore, we will analyze four different assets-government bonds, corporate bonds, money market instruments, and equities-and study the conditional correlation between them. We find that the corporate bond market tends to increase coupling in turbulent times, while the money market decreases coupling. We propose to test international spillovers taking into account a methodology for estimating the conditional mean, variance, and covariance on domestic bond and equity markets, while considering that shocks may have asymmetric effects depending on whether the news is good or bad.