Time connectedness of fear

Julián Andrada-Félix (), Adrian Fernandez-Perez (), Fernando Fernández-Rodríguez () and Simon Sosvilla-Rivero
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Julián Andrada-Félix: Universidad de Las Palmas de Gran Canaria
Adrian Fernandez-Perez: Auckland University of Technology
Fernando Fernández-Rodríguez: Universidad de Las Palmas de Gran Canaria

Empirical Economics, 2022, vol. 62, issue 3, No 1, 905-931

Abstract: Abstract This paper examines the interconnection between four implied volatility indices representative of the investors' consensus view of expected stock market volatility at different maturities during the period from 3 January 2011 to 4 May 2018. To this end, we first perform static analysis to measure the total volatility connectedness in the entire period using a framework proposed by Diebold and Yilmaz (J Econ 182: 119–134, 2014). Second, we apply a dynamic analysis to evaluate both the net directional connectedness for each market using the TVP-VAR connectedness approach developed by Antonakakis and Gabauer (Refined measures of dynamic connectedness based on TVP-VAR. MPRA, Working Paper No. 78282, 2017). Our results suggest that 72.27% of the total variance of the forecast errors is explained by shocks across the examined maturities, indicating that the remainder 27.73% of the variation is due to idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability. Our results are robust to control by macroeconomic and uncertainty factors, and persistent across US and European implied volatility indices.

Keywords: Implied volatility indices; Financial market linkages; Connectedness; Vector autoregression; Variance decomposition (search for similar items in EconPapers)
JEL-codes: C53 E44 F31 G15 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00181-021-02056-w

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