Time Connectedness of Fear

42 Pages Posted: 20 Oct 2018

See all articles by Julián Andrada Félix

Julián Andrada Félix

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

Adrian Fernandez-Perez

Auckland University of Technology

Fernando Fernández Rodríguez

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

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: September 27, 2018

Abstract

This paper examines the interconnection between four implied volatility indices representative of the investors' consensus view of expected stock market volatility at different maturities during the period January 3, 2011-May 4, 2018. To this end, we first perform a static analysis to measure the total volatility connectedness in the entire period using a framework proposed by Diebold and Yilmaz (2014). Second, we apply a dynamic analysis to evaluate both the net directional connectedness for each market using the TVP-VAR connectedness approach developed by Antonakakis and Gabauer (2017). Our results suggest that a 72.27%, of the total variance of the forecast errors is explained by shocks across the examined investor time horizons, indicating that the remainder 27.73% 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. Finally, we also document a superior performance of the TVP-VAR approach to connectedness respect to the original one proposed by Diebold and Yilmaz (2014).

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 Fernández Rodríguez, Fernando and Sosvilla-Rivero, Simon, Time Connectedness of Fear (September 27, 2018). Available at SSRN: https://ssrn.com/abstract=3256112 or http://dx.doi.org/10.2139/ssrn.3256112

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)

Fernando Fernández Rodríguez

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

Campus de Tafira
E-35017 Las Palmas
Spain
+34 928 45 18 02 (Phone)
+34 928 45 18 29 (Fax)

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( 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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