Measuring the Spillovers of Uncertainty Shocks

33 Pages Posted: 6 May 2019 Last revised: 25 Jun 2019

Date Written: June 1, 2019

Abstract

Uncertainty shocks affect expectations and corporate profits and mostly transmit globally. This article provides an uncertainty shocks spillover index from the log-ratio of volatility indices to measure the transmission of uncertainty shocks across European financial markets from 2001 to 2018. The index confirms options markets' ability to price the spillover of political, economic, and financial uncertainty shocks, even those due to terror attacks. The role of the UK and Swiss (non-EMU) options markets explaining the transmission of uncertainty shocks declines after the Brexit, while higher uncertainty results in uncertainty shock contagion depending on the moment of the business and financial cycles. Obtained results improve our understanding of the inter-market connectedness and the flow of uncertainty shocks, aiding central banks to explain the effectiveness of monetary policy (forward guidance), policymakers to design effective policies' implementation, and risk managers to buy risk (volatility) protection at the lowest cost.

Keywords: Model-free Volatility Indices, Spillovers, Uncertainty, VAR

JEL Classification: E3, F3, F6, G1

Suggested Citation

Gonzalez-Perez, Maria T., Measuring the Spillovers of Uncertainty Shocks (June 1, 2019). Available at SSRN: https://ssrn.com/abstract=3267329 or http://dx.doi.org/10.2139/ssrn.3267329

Maria T. Gonzalez-Perez (Contact Author)

Bank of Spain ( email )

Calle Alcala, 48
Madrid, 28014
Spain
+34 913388587 (Phone)

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