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Time connectedness of fear

Julián Andrada-Félixa (), Adrian Fernandez-Perez (), Fernando Fernández-Rodríguez () and Simon Sosvilla-Rivero ()
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Julián Andrada-Félixa: Department of Quantitative Methods in Economics, Universidad de Las Palmas de Gran Canaria, Las Palmas de Gran Canaria, Spain.
Adrian Fernandez-Perez: Department of Finance, Auckland University of Technology, Auckland, New Zealand.
Fernando Fernández-Rodríguez: Department of Quantitative Methods in Economics, Universidad de Las Palmas de Gran Canaria, Las Palmas de Gran Canaria, Spain.

No 201818, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

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 January 3, 2011-May 4, 2018. To this end, we first perform a static analysis to measure the total volatility connectedness in the entire period using a framework proposed by Diebold and Yilmaz (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 (2017). Our results suggest that a 72.27%, of the total variance of the forecast errors is explained by shocks across the examined investor time horizons, 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. Finally, we also document a superior performance of the TVP-VAR approach to connectedness respect to the original one proposed by Diebold and Yilmaz (2014).

Keywords: Implied volatility indices; Financial market Linkages; Connectedness; Vector Autoregression; Variance Decomposition. JEL classification:C53; E44; F31; G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg
Date: 2018-09, Revised 2018-09
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