NetVIX — A network volatility index of financial markets

Daniel Felix Ahelegbey and Paolo Giudici

Physica A: Statistical Mechanics and its Applications, 2022, vol. 594, issue C

Abstract: We construct a network volatility index (NetVIX) via market interconnectedness and volatilities to measure global market risk. The NetVIX multiplicatively decomposes into a network volatility effect and a network contagion effect. It also additively decomposes into volatility contributions of each market. We apply our measure to study the relationship between the interconnectedness among 20 major stock markets and global market risks over the last two decades. We show that the NetVIX has a strong relationship with the VIX index, and therefore able to reliably signal changes in global market volatility. We also show that while the NetVIX tracks to some extent the VIX, it provides much more information about the level of volatility and contagion effects in financial markets. The result shows that during crisis periods, particularly the tech bubble, the global financial crisis, and the Covid-19 pandemic, stock market interconnectedness contributes to global market turmoil by amplifying average market volatility with over 400 percent multiplier. Also during crisis times, the level of risk is relatively higher and more persistent in the US and German markets, which implies market losses for investors with long exposures. The results also reveal that the highest risk-contributing markets are the US, Brazil, Hong Kong, France, and Germany.

Keywords: Centrality; Covid-19; Financial crises; NetVIX; Contagion effect; VAR; VIX (search for similar items in EconPapers)
JEL-codes: C11 C15 C51 C52 C55 C58 G01 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: NetVIX - A Network Volatility Index of Financial Markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:594:y:2022:i:c:s0378437122000917

DOI: 10.1016/j.physa.2022.127017

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