Volatility Spillovers and the Effect of News Announcements
33 Pages Posted: 17 Jul 2010 Last revised: 11 Apr 2012
Date Written: April 5, 2012
Abstract
We examine the effect of U.S. and European news announcements on the spillover of volatility across U.S. and European stock markets. Using synchronously observed international implied volatility indices at a daily frequency, we find significant spillovers of implied volatility between U.S. and European markets as well as within European markets. We observe a stark contrast in the effect of scheduled versus unscheduled news releases. Scheduled (unscheduled) news releases resolve (create) information uncertainty, leading to a decrease (increase) in implied volatility. Nevertheless, news announcements do not fully explain the volatility spillovers, although they do affect the magnitude of volatility spillovers. Our results are robust to extreme market events such as the recent financial crisis and provide evidence of volatility contagion across markets.
Keywords: Contagion, Scheduled news announcements, Unscheduled news announcements, Implied volatility, Implied volatility index,Volatility spillovers
JEL Classification: G13, G14, G15
Suggested Citation: Suggested Citation
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