NetVIX - A Network Volatility Index of Financial Markets

Abstract

We construct a network volatility index (NetVIX) via market interconnectedness and volatilities to measure global market turbulence. The NetVIX multiplicatively decomposes into an average volatility and a network amplifier index. It also additively decomposes into marginal volatility indices for measuring individual contribution to global turmoil. We apply our measure to study the relationship between the interconnectedness among 20 major stock markets and global market risks over the last two decades. The NetVIX is shown to be a novel approach to measuring global market risk, and an alternative to the VIX. The result shows that during crisis periods, particularly the tech-bubble, sub-prime, and COVID-19 pandemic, the interconnectedness of the markets amplifies average market risk more than 700 percent to cause a global meltdown. We find evidence that the highest risk-contributing markets to global meltdown are the US, Brazil, Hong Kong, France, and Germany.

Keywords: Centrality, COVID-19, Financial Crises, NetVIX, Turbulence, VAR, VIX

JEL Classification: C11, C15, C51, C52, C55, C58, G01, G12