Are Volatility Expectations in Different Countries Interdependent? A Data-Driven Solution to Structural VAR Identification for Implied Equity Volatility Indices

• Main Author: de Silva, Timothy H
• Format: Others
• Published: Scholarship @ Claremont 2018
• Subjects: Volatility; Implied volatility; VIX; Structural VAR; Spillover; Asia; Econometrics; Finance
• Online Access: http://scholarship.claremont.edu/cmc_theses/1772; http://scholarship.claremont.edu/cgi/viewcontent.cgi?article=2845&context=cmc_theses

Over the past couple of decades, the number of volatility indices has increased rapidly. These indices seek to represent the market’s expectation of realized volatility over the coming month, based on the prices of options traded on each underlying equity index. Although the dynamics of realized volatility spillover have been studied extensively, very few studies exists that examine the spillover between these volatility indices. By using DAG-based structural vector autoregression, this paper provides evidence that implied volatility spillover differs from realized volatility spillover. Through solving the well-known VAR identification problem for these indices, this paper finds that Asia, more specifically Hong Kong, plays a central role in implied volatility spillover during and after the 2008 financial crisis.