The international spillover behaviour of implied volatilities and forecasting ability of spillover indices

Tzeng Kae-Yih

Applied Economics, 2023, vol. 55, issue 48, 5719-5735

Abstract: In this study, we investigate the spillover behaviours of implied volatilities and test the forecasting power of spillover indices. By using a Diebold and Yilmaz’s (2012) framework, we capture a better overall picture of the developments of spillover effects and create a series of spillover indices by quantifying the spillover intensity for each rolling time window such that we are able to investigate the forecasting ability of spillover indices on market returns. There are several findings in this study including (1) the spillover indices of implied volatilities not only enable us to describe the spillover effects but also possess strong forecasting power on market returns, (2) implied volatilities which own emotional-related characteristic create stronger spillover mechanisms than spillover of market returns and (3) by observing the time-varying patterns of spillover indices of implied volatilities, we find that the peaks of spillover indices occur during well-known economic events such as the Lehman Brothers’ Bankruptcy and Greek debt restructuring.

Date: 2023
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DOI: 10.1080/00036846.2022.2140760

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