US Implied Volatility as a Predictor of International Returns

Quantitative Finance and Economics, Vol. 1, Issue: 4, pp. 388-402

20 Pages Posted: 24 Oct 2017 Last revised: 21 Dec 2017

Mehmet F. Dicle

Loyola University New Orleans - Joseph A. Butt, S.J. College of Business; Research ATA, LLC

Date Written: November 3, 2017

Abstract

This study provides evidence of the US implied volatility’s effect on international equity markets’ returns. This evidence has two main implications: i) investors may find that foreign equity returns adjusting to US implied volatility may not provide true diversification benefits, and ii) foreign equity returns may be predicted using US implied volatility. Our sample includes US volatility index (VIX) and major equity indexes in twenty countries for the period between January, 2000 through July, 2017. VIX leads eighteen of the international markets and Granger causes seventeen of the markets after controlling for the S&P-500 index returns and the 2007/2008 US financial crisis. US investors looking to diversify US risk may find that international equities may not provide intended diversification benefits. Our evidence provides support for predictability of international equity returns based on US volatility.

Keywords: diversification, implied volatility, VIX, forecasting

JEL Classification: G10, G15

Suggested Citation

Dicle, Mehmet F., US Implied Volatility as a Predictor of International Returns (November 3, 2017). Quantitative Finance and Economics, Vol. 1, Issue: 4, pp. 388-402. Available at SSRN: https://ssrn.com/abstract=3057745 or http://dx.doi.org/10.2139/ssrn.3057745

Mehmet F. Dicle (Contact Author)

Research ATA, LLC ( email )

Mandeville, LA 70448
United States

HOME PAGE: http://researchata.com

Loyola University New Orleans - Joseph A. Butt, S.J. College of Business ( email )

6363 St. Charles Avenue
New Orleans, LA 70118
United States

HOME PAGE: http://researchforprofit.com

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