Fear connectedness among asset classes

Abstract

This study investigates the interconnection between five implied volatility indices representative of different financial markets during the period August 1, 2008-September 9, 2015. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yılmaz (2014). Second, we make use of a dynamic analysis to evaluate both the net directional connectedness for each market and all net pair-wise directional connectedness. Our results suggest that slightly more than only 38.23%, of the total variance of the forecast errors is explained by shocks across markets, indicating that the remainder 61.77% of the variation is due to idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability