Quantifying domestic and international linkage of financial assets

In this paper, we research the linkage of domestic and international financial assets by analyzing the spillovers between short-term interest rates, bond yields and stock returns from American and European asset markets. We do this using two methods. The first is based on estimating the significance of the structural parameters of a vector autoregressive model that measure the contemporaneous relation between these assets. The second relies on computing forecast error variance decompositions to create spillover indices with which the relations of interest can be quantified. Our results show that in general transmission within individual asset types is the strongest and that US assets tend to influence European assets more than vice versa. Furthermore, spillovers between asset classes increase during financial crises and recessions compared to tranquil periods.