GRANGER CAUSALITY IN VOLATILITY BETWEEN AUSTRALIAN EQUITY AND DEBT MARKETS: A BAYESIAN ANALYSIS

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Abstract

This paper is concerned with identifying Granger causality in the volatilities of returns between the Australian equity and debt markets. Using a bivariate stochastic volatility model previously described by Yu and Renate (2006), we estimate and compare four causal models between equity market volatility, and the short term and long term debt market volatilities. The causal models are compared with two non-causal, bivariate stochastic volatility models. Models comparisons are performed using the Deviance Information Criteria (DIC). Modelling results suggest that bond market volatility Granger causes equity market volatility. Equity volatility and money market volatility show evidence of Granger causality between the two, but no dominate causal direction is identified suggesting causal feedback between the two market volatilities.

Keywords: Granger Causality, Financial Markets, Stochastic Volatility, Bayesian Analysis

How to cite this paper: Sanford, A. D. (2011). Granger causality in volatility between Australian equity and debt markets: A Bayesian analysis. Corporate Ownership & Control, 9(1-6), 587-596. https://doi.org/10.22495/cocv9i1c6art2