US Implied Volatility as a Predictor of International Returns
20 Pages Posted: 24 Oct 2017 Last revised: 19 Nov 2017
Date Written: November 3, 2017
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: Suggested Citation