Does the World Smile Together? A Network Analysis of Global Index Option Implied Volatilities

44 Pages Posted: 30 Mar 2021 Last revised: 10 Apr 2021

See all articles by Qian Han

Qian Han

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

DooJin Ryu

Independent

Maggie Chen

affiliation not provided to SSRN

Jing Tang

Department of Anesthesiology, Affiliated Hospital of Guangdong Medical University

Date Written: March 29, 2021

Abstract

We apply the directed acyclic graph and spillover index models and find significant evidence of both implied volatility contagion and spillover. First, the global implied volatility smiles exhibit strong regional clustering. The European and American options markets form a separate contemporary contagion cluster from the Asia-Pacific region. However, the 30-day-lag test shows that none of these markets are completely independent of the other two regions in the long run. Among all of them, the European index options markets demonstrate the strongest implied volatility smile contagion. Second, there exists obvious heterogeneity among different markets in terms of the implied volatility spillover, and extreme market conditions like crises seem to intensify the spillover effect. A broader category of factors, including the short-run underlying index return trend, at-the-money option implied volatility and interest rate term spread, are the key determinants of implied volatility spillovers.

Keywords: Contagion; Directed Acyclic Graph (DAG); Global Index Options Markets; Implied Volatility Smile; Volatility Spillover

JEL Classification: G13; G15

Suggested Citation

Han, Qian and Ryu, DooJin and Chen, Maggie and Tang, Jing, Does the World Smile Together? A Network Analysis of Global Index Option Implied Volatilities (March 29, 2021). Available at SSRN: https://ssrn.com/abstract=3814852 or http://dx.doi.org/10.2139/ssrn.3814852

Qian Han (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 361005
China

HOME PAGE: http://www.wise.xmu.edu.cn/viewNews.asp?id=2422

DooJin Ryu

Independent

Maggie Chen

affiliation not provided to SSRN

Jing Tang

Department of Anesthesiology, Affiliated Hospital of Guangdong Medical University

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