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Does the world smile together? A network analysis of global index option implied volatilities

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  • Chen, Jing
  • Han, Qian
  • Ryu, Doojin
  • Tang, Jing

Abstract

This study uses directed acyclic graph and spillover index models to find significant evidence of both implied volatility contagion and spillovers. First, we observe strong regional clustering among the implied volatility smiles of global markets. European and American options markets form a separate contemporaneous contagion cluster from markets in the Asia-Pacific region. However, no market is completely independent from the markets in the other two regions in the long run. The European index options markets demonstrate the strongest implied volatility smile contagion. Second, we observe the heterogeneity across different markets in terms of implied volatility spillover, and extreme market conditions, such as crises, seem to intensify the spillover effects. The trend in the short-run underlying index return, the implied volatility of at-the-money options, and the interest rate term spread are key determinants of implied volatility spillovers.

Suggested Citation

  • Chen, Jing & Han, Qian & Ryu, Doojin & Tang, Jing, 2022. "Does the world smile together? A network analysis of global index option implied volatilities," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:intfin:v:77:y:2022:i:c:s1042443121002018
    DOI: 10.1016/j.intfin.2021.101497
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    More about this item

    Keywords

    Contagion; Directed acyclic graph; Global index options markets; Implied volatility smile; Volatility spillover;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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