A New Channel for Global Volatility Propagation
39 Pages Posted: 8 May 2020 Last revised: 4 Jan 2022
Date Written: January 2, 2022
We compare two channels for global impact on local volatility: the direct channel in which global variables affect the expected value of local volatility, and a new channel in which they affect local volatility persistence. Using 21 equity indices in 17 developed economies, we show that (1) global variables are the main determinants of local volatility persistence; (2) the volatility-persistence channel contributes far more to local volatility variations than the direct channel; and (3) global return contributes far more to local volatility variations than global volatility. The global impact on local volatility persistence help explain global commonality in volatility dynamics.
Keywords: international volatility propagation, conditional volatility persistence, market volatility, global return, global volatility
JEL Classification: G12, G15, C22, F36
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