Does the world smile together? A network analysis of global index option implied volatilities

Jing Chen, Qian Han, Doojin Ryu and Jing Tang

Journal of International Financial Markets, Institutions and Money, 2022, vol. 77, issue C

Abstract: This study uses directed acyclic graph and spillover index models to find significant evidence of both implied volatility contagion and spillovers. First, we observe strong regional clustering among the implied volatility smiles of global markets. European and American options markets form a separate contemporaneous contagion cluster from markets in the Asia-Pacific region. However, no market is completely independent from the markets in the other two regions in the long run. The European index options markets demonstrate the strongest implied volatility smile contagion. Second, we observe the heterogeneity across different markets in terms of implied volatility spillover, and extreme market conditions, such as crises, seem to intensify the spillover effects. The trend in the short-run underlying index return, the implied volatility of at-the-money options, and the interest rate term spread are key determinants of implied volatility spillovers.

Keywords: Contagion; Directed acyclic graph; Global index options markets; Implied volatility smile; Volatility spillover (search for similar items in EconPapers)
JEL-codes: G11 G13 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:77:y:2022:i:c:s1042443121002018

DOI: 10.1016/j.intfin.2021.101497

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