Fear Connectedness Among Asset Classes

Research Institute of Applied Economics Working Paper 2017/03

42 Pages Posted: 3 Feb 2017  

Julián Andrada Félix

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Adrian Fernandez-Perez

Auckland University of Technology

Simon Sosvilla-Rivero

Complutense Institute for International Studies

Date Written: January 31, 2017

Abstract

This study investigates the interconnection between five implied volatility indices representative of different financial markets during the period August 1, 2008-September 9, 2015. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yılmaz (2014). Second, we make use of a dynamic analysis to evaluate both the net directional connectedness for each market and all net pair-wise directional connectedness. Our results suggest that slightly more than only 38.22%, of the total variance of the forecast errors is explained by shocks across markets, indicating that the remainder 61.78% of the variation is due to idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability.

Keywords: Implied volatility indices, Financial market Linkages, Connectedness, Vector Autoregression, Variance Decomposition.

JEL Classification: C53, E44, F31, G15

Suggested Citation

Andrada Félix, Julián and Fernandez-Perez, Adrian and Sosvilla-Rivero, Simon, Fear Connectedness Among Asset Classes (January 31, 2017). Research Institute of Applied Economics Working Paper 2017/03 . Available at SSRN: https://ssrn.com/abstract=2910851 or http://dx.doi.org/10.2139/ssrn.2910851

Julián Andrada Félix

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

E-35017 Las Palmas
Spain
+34 928 45 59 89 (Phone)
+34 928 45 18 29 (Fax)

Adrian Fernandez-Perez

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 9 921 9999 (Phone)
+64 9 921 9940 (Fax)

Simon Sosvilla-Rivero (Contact Author)

Complutense Institute for International Studies ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

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