Volatility Risk Pass-Through
50 Pages Posted: 27 Nov 2015 Last revised: 12 Nov 2018
Date Written: November 12, 2018
We develop a novel measure of volatility pass-through to assess international propagation of output volatility shocks to macroeconomic aggregates, equity prices, and currencies. An increase in country’s output volatility is associated with a decrease in its output, consumption, and net exports. The average consumption pass-through is 50% (a 1% increase in output volatility increases consumption volatility by 0.5%) and it increases to 70% for shocks originating in smaller countries. The equity volatility pass-through is 90%, whereas the link between volatility of currency and fundamentals is weak. A novel channel of risk sharing of volatility risks can explain our empirical findings.
Keywords: Volatility pass-through, foreign exchange disconnect, risk sharing
JEL Classification: C62; F31; G12
Suggested Citation: Suggested Citation