Global Equity Market Volatility Spillovers: A Broader Role for the United States

65 Pages Posted: 16 Feb 2016 Last revised: 5 May 2016

Daniel Buncic

University of St. Gallen

Katja I. M. Gisler

University of St. Gallen

Date Written: May 4, 2016

Abstract

Rapach et al. (2013) have recently shown that U.S. equity market returns carry valuable information to improve return forecasts in global equity markets. In this study, we extend the work of Rapach et al. (2013) and examine if U.S. based equity market information can be used to improve realized volatility forecasts in a large cross-section of international equity markets. We use volatility data for the U.S. and 17 foreign equity markets from the Oxford Man Institute’s realized library and augment for each foreign equity market our benchmark HAR model with U.S. equity market volatility information. We show that U.S. equity market volatility information substantially improves out-of-sample forecasts of realized volatility in all 17 foreign equity markets that we consider. Forecast gains are not only highly significant, but produce out-of-sample R 2 values between 4.56% and 14.48%, with 12 of these being greater than 10%. The improvements in out-of-sample forecasts remain statistically significant for horizons up to 1 month ahead. A substantial part of the predictive gains are driven by forward looking volatility as captured by the VIX.

Keywords: Realized Volatility, HAR modelling and forecasting, augmented HAR model, U.S. volatility information, VIX, international volatility spillovers

JEL Classification: C22, C52, C53, E17, F31, G17

Suggested Citation

Buncic, Daniel and Gisler, Katja I. M., Global Equity Market Volatility Spillovers: A Broader Role for the United States (May 4, 2016). Available at SSRN: https://ssrn.com/abstract=2732498 or http://dx.doi.org/10.2139/ssrn.2732498

Daniel Buncic (Contact Author)

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Katja I. M. Gisler

University of St. Gallen ( email )

Institute of Mathematics and Statistics
Bodanstrasse 6
St. Gallen, St. Gallen CH-9000
Switzerland

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