European ‘Fear’ Indices – Evidence Before and During the Financial Crisis

46 Pages Posted: 23 May 2013

See all articles by Wolfgang Aussenegg

Wolfgang Aussenegg

Vienna University of Technology

Lukas Götz

UNIQA Finanz-Service GmbH

Ranko Jelic

University of Sussex Business School

Date Written: May 5, 2013


We document a negative and asymmetric contemporaneous relation of European stock and implied volatility returns. The negative relation is significantly more pronounced at the highest quantile of the stock market return distribution (i.e. largest price decrease). The relation between stock returns and implied volatility exhibits differences consistent with European institutional and cultural clusters. For example, German stock market tends to be more responsive to changes in implied volatility compared to UK stock market. In addition, the volatility spread for these two markets persist for a longer period compared to other European volatility spreads. The degree of integration between the leading European (UK, Germany and France) volatility markets, however, is very high and shocks on the implied volatility spread die out within a few days. Our Markov switching model distinguishes three volatility regimes. Large changes in both, implied volatility and stock returns increase the probability that volatility enters a higher (from low to middle and from middle to high) volatility regime. Factor loadings obtained by principal component analysis (PCA) of volatility returns are also regime dependent. Compared to US, the changes in European implied volatility tend to be more driven by tilts and non-linear movements of the volatility term structure. Our findings lend support to the behavioral explanation of the stock return-implied volatility relation and have implications for risk management.

Keywords: European volatility indices, Return-volatility relation, Markov switching, Quantile regression, Impulse response function

JEL Classification: C32, G13, G15

Suggested Citation

Aussenegg, Wolfgang and Götz, Lukas and Jelic, Ranko, European ‘Fear’ Indices – Evidence Before and During the Financial Crisis (May 5, 2013). Available at SSRN: or

Wolfgang Aussenegg

Vienna University of Technology ( email )

Theresianumgasse 27
Vienna, A-1040
+43 1 58801 33082 (Phone)
+43 1 58801 33098 (Fax)


Lukas Götz

UNIQA Finanz-Service GmbH ( email )

Untere Donaustraße 21
Vienna, 1029

Ranko Jelic (Contact Author)

University of Sussex Business School ( email )

Falmer, Brighton BN1 9SL
United Kingdom
+441273872597 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics