Volatility linkage across global equity markets

Are Volatility Expectations in Different Countries Interdependent? A Data-Driven Solution to Structural VAR Identification for Implied Equity Volatility Indices

“…This suggests that this recurring spillover I find from Asia to the US is not purely attributable to a trading hours' difference because if it was, shocks Japan and Korea would have a more similar effect on the US as those in Hong Kong. My finding that Hong Kong is a source of spillover, yet Japan is relatively exogenous, is consistent with Bessler and Yang's (2003) findings, but contradicts the findings of Ding, Huang, and Pu (2014). The similarity of my results with those of Bessler and Yang (2003) shows the value of using a structural VAR to examine spillover, instead of the reduced-form VAR used by Ding, Huang, and Pu (2014).…”

“…The similarity of my results with those of Bessler and Yang (2003) shows the value of using a structural VAR to examine spillover, instead of the reduced-form VAR used by Ding, Huang, and Pu (2014). By using a reduced-form VAR with non-orthogonal innovations, Ding, Huang, and Pu (2014) are not able to decompose the movements of each implied volatility index into shocks to other indices and hence, cannot uncover Hong Kong as an initial source of implied volatility spillover.…”

“…Although realized volatility spillover has been studied extensively (Hamao, Masulis, and Ng (1990); Engle (1994); Kanas (1998)), to my knowledge only three studies have examined the dynamics of implied volatility spillover (Aboura (2003);Narwal, Sheera, and Mittal (2013);Ding, Huang, and Pu (2014)). This paper expands upon those three papers by using a DAG to identify a structural VAR, which permits the use of forecast error variance and historical decompositions based on the orthogonalized innovations.…”

“…However, this spillover could be driven by a difference in trading hours, which is considered in this paper. Ding, Huang, and Pu (2014) used volatility indices from developed countries to examine if there was any change in the correlation structure following the financial crisis. They found no significant change, but found that the implied volatility spillovers during the crisis became one-dimensional from the US, like what has been documented for realized volatility spillovers.…”

“…First, this paper adds to the very small area of literature surrounding spillover among implied volatility indices by examining more volatility indices over a longer sample period than has previously been done. To my knowledge, only three papers (Aboura (2003); Narwal, Sheera, and Mittal (2013); Ding, Huang, and Pu (2014)) have examined spillover between these volatility indices. This paper is the first to make an attempt to solve the identification problem for volatility indices to estimate a structural VAR, while the past literature has simply used a reduced-form VAR.…”