Market linkage and information spillover: Evidence from pre-crisis, crisis, and recovery periods

We examine market linkage and information spillover across the U.S. stock, corporate bond, and credit derivatives markets in the pre-crisis, crisis, and recovery periods. Our results suggest that information spills over across markets in a timely manner. We find that the market linkage becomes stronger in the crisis period, which could be explained by the increasing volatility and deteriorating funding liquidity. In particular, volatility plays a dominant role in the information transmission, which absorbs the liquidity effect when both volatility and liquidity are included as exogenous factors in a vector autoregressive model.

► We analyze the cross-market linkage from 2004 to 2009, which includes the recent global financial crisis.
► We examine the status of market linkage across stock, bond, and credit derivatives markets.
► We investigate the factors influencing the market linkage.
► We find that the correlation structure changes dramatically in the periods before and after the crisis.
► We find that volatility plays the dominant role in the information transmission.