Asymmetric Return-Volatility Relation, Volatility Transmission and Implied Volatility Indexes

37 Pages Posted: 16 Feb 2009 Last revised: 27 Jan 2010

See all articles by Ihsan Badshah

Ihsan Badshah

Auckland University of Technology

Date Written: February 15, 2009

Abstract

The purpose of this study is twofold: First, to investigate the asymmetric return-volatility phenomenon with newly adapted robust volatility indexes VIX, VXN, VDAX and VSTOXX. Second, we examine the dynamic implied volatility transmissions across the implied volatility indexes using techniques such as Granger causality, generalized impulse response function and variance decomposition. We find pronounced negative and asymmetric return-volatility relationships between each volatility index and its corresponding stock market index. The VIX volatility index presents the highest asymmetric return-volatility relationship followed by the VSTOXX, VDAX and VXN volatility indexes, respectively. Moreover, there are significant spillover effects across the volatility indexes, bi-directional causality running between the volatility indexes. Further, in innovation accounting investigations, the VIX volatility index influences the other three volatility indexes considerably. However, in the European context, VDAX is the dominant source of information. Our findings have implications for trading strategies, hedging portfolios, pricing and hedging volatility derivatives, and risk management.

Keywords: implied volatility, index options, volatility indexes, volatility-return relation, volatility transmissions.

JEL Classification: G12, G13, G15

Suggested Citation

Badshah, Ihsan, Asymmetric Return-Volatility Relation, Volatility Transmission and Implied Volatility Indexes (February 15, 2009). Available at SSRN: https://ssrn.com/abstract=1344413 or http://dx.doi.org/10.2139/ssrn.1344413

Ihsan Badshah (Contact Author)

Auckland University of Technology ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand
+64 9 9219999 Extn: 5394 (Phone)
+64 9 219940 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
453
Abstract Views
1,773
rank
63,260
PlumX Metrics