A variance spillover analysis without covariances: What do we miss?

•We perform a variance spillover analysis that allows for covariance spillovers.•We build on realised covariance measures derived from high-frequency data.•Ignoring covariances severely underestimates system-wide dependencies.•Cross variance and cross covariance spillovers are material spillover channels.•Covariance spillovers help to trace the financial and the US debt ceiling crisis.

We evaluate the relevance of covariances in the transmission mechanism of variance spillovers across the US stock, US bond and gold markets from July 2003 to December 2012. For that purpose, we perform a comparative spillover analysis between a model that considers covariances and a model that considers only variances. Our results emphasise the importance of covariances. Including covariances leads to an overall increase of the spillover level and detects the beginnings of the financial crisis and of the US debt ceiling crisis earlier than the spillover measure that considers only variances. Even for the low-dimensional system that we consider, one misses important variance spillover channels when covariances are excluded.