Contemporaneous Spill-Over Among Equity, Gold, and Exchange Rate Implied Volatility Indices

33 Pages Posted: 16 Aug 2012

See all articles by Ihsan Badshah

Ihsan Badshah

Auckland University of Technology

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law

Date Written: August 15, 2012

Abstract

This paper examines the contemporaneous spill-over effects among the CBOE implied volatility indices for stocks (VIX), gold (GVZ) and the exchange rate (EVZ). We use the 'identification through heteroskedasticity' approach of Rigobon (2003) to decompose the contemporaneous relationship between these implied volatility indices into causal relationships. Our findings suggest that there is strong unidirectional, spill-over from VIX to GVZ and EVZ, where increases in stock market volatility lead to increases in gold and exchange rate volatility; and bi-directional spill-over between GVZ and EVZ. We emphasize the implications of our model by comparing the impulse-responses generated by our structural VAR with the impulse-responses of a traditional VAR. Our results show that the responses to shocks originating in GVZ and EVZ are seriously overestimated in the traditional VAR. These findings on the direction and magnitude of spill-over and the long-run impact on volatility have important implications for portfolio and risk management.

Keywords: spill-over, implied volatility indices

JEL Classification: C32, C58, G1

Suggested Citation

Badshah, Ihsan and Frijns, Bart and Tourani-Rad, Alireza, Contemporaneous Spill-Over Among Equity, Gold, and Exchange Rate Implied Volatility Indices (August 15, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2130312 or http://dx.doi.org/10.2139/ssrn.2130312

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)

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

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