Implied Volatility Around the World: Geographical Markets and Asset Classes

CERGE-EI Working Paper Series No. 562

35 Pages Posted: 28 Apr 2016 Last revised: 21 Apr 2018

See all articles by Julian Velev

Julian Velev

University of Puerto Rico

Brian Payne

US Air Force Academy

Jiri Tresl

University of Mannheim

Wilfredo Toledo

University of Puerto Rico

Date Written: April 1, 2016

Abstract

This study analyzes the implied volatility-return relationship across asset classes, geographical regions, and time, which extends efforts documenting the instantaneous relation between implied volatility changes and index returns. Modeling the relationships as a GARCH process with lagged terms, we confirm that implied volatility depends on the immediate index changes. However, contemporaneous volatility changes are also explained by lagged index returns and past volatility moves. While this short-term volatility behavior is heavily asymmetric on the side of negative moves, in the long-term there is indifference between positive and negative moves. Volatility also appears to transfer from larger, primary markets to smaller, secondary markets, as price moves in larger markets explain a large portion of volatility in smaller markets. Volatility in larger markets also transfers to the commodity and currency markets.

Keywords: implied volatility, GARCH, Risk transfer, International asset classes

JEL Classification: C22, C58, F37, G15

Suggested Citation

Velev, Julian and Payne, Brian and Tresl, Jiri and Toledo, Wilfredo, Implied Volatility Around the World: Geographical Markets and Asset Classes (April 1, 2016). CERGE-EI Working Paper Series No. 562. Available at SSRN: https://ssrn.com/abstract=2770138 or http://dx.doi.org/10.2139/ssrn.2770138

Julian Velev

University of Puerto Rico ( email )

Ponce De Leon Avenue
00931-3300
Puerto Rico

Brian Payne

US Air Force Academy ( email )

Colorado Springs, CO
United States

Jiri Tresl (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Wilfredo Toledo

University of Puerto Rico ( email )

Ponce De Leon Avenue
00931-3300
Puerto Rico

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