Macro-finance asset pricing models provide a rationale for connectedness dynamics
between equity and Treasury risk-neutral volatilities. In this paper, we study the total
and directional connectedness, in the sense of spillover effects, between risk-neutral
volatilities from the equity and Treasurymarkets. In addition, we analyze the economic
and monetary drivers of connectedness dynamics. Most of the time, but especially
during bad economic times, we find significant net spillovers from Treasury to equity
risk-neutral volatility. The spillover channel between risk-neutral volatilities arises
mainly through the government fixed income market.
