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
Date Written: April 1, 2016
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: Suggested Citation