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On financial contagion and implied market volatility

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  • Kenourgios, Dimitris

Abstract

This paper investigates volatility contagion across U.S. and European stock markets during the Global Financial Crisis (GFC) and the Eurozone Sovereign Debt Crisis (ESDC). Using a sample of international implied volatility indices on daily changes, I explore asymmetric conditional correlation dynamics across stable and crisis periods and across the different phases of both crises. Empirical evidence indicates the existence of contagion in cross-market volatilities. A different pattern of infection is observed across the phases, since the early phase of the GFC and the late period of escalation of the Euro crisis are the most contagious periods. This implies that the initial signal of the two crises has been differently recognized by implied volatility markets. The results provide important implications for the effectiveness of international portfolio diversification and volatility hedging during periods of negative shocks.

Suggested Citation

  • Kenourgios, Dimitris, 2014. "On financial contagion and implied market volatility," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 21-30.
  • Handle: RePEc:eee:finana:v:34:y:2014:i:c:p:21-30
    DOI: 10.1016/j.irfa.2014.05.001
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    Citations

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    Cited by:

    1. Kenourgios, Dimitris & Naifar, Nader & Dimitriou, Dimitrios, 2016. "Islamic financial markets and global crises: Contagion or decoupling?," Economic Modelling, Elsevier, vol. 57(C), pages 36-46.
    2. Naifar, Nader, 2016. "Do global risk factors and macroeconomic conditions affect global Islamic index dynamics? A quantile regression approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 29-39.
    3. Thakolsri, Supachok & Sethapramote, Yuthana & Jiranyakul, Komain, 2015. "Implied volatility transmissions between Thai and selected advanced stock markets," MPRA Paper 65901, University Library of Munich, Germany.
    4. repec:eee:ecmode:v:66:y:2017:i:c:p:112-120 is not listed on IDEAS
    5. Cipollini, Andrea & Cascio, Iolanda Lo & Muzzioli, Silvia, 2015. "Volatility co-movements: A time-scale decomposition analysis," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 34-44.
    6. repec:eee:ecmode:v:65:y:2017:i:c:p:30-40 is not listed on IDEAS
    7. Alexakis, Panayotis D. & Kenourgios, Dimitris & Dimitriou, Dimitrios, 2016. "On emerging stock market contagion: The Baltic region," Research in International Business and Finance, Elsevier, vol. 36(C), pages 312-321.
    8. repec:eee:intfin:v:50:y:2017:i:c:p:1-12 is not listed on IDEAS
    9. Dimitrios Dimitriou, 2016. "Greek debt negotiations and VIX currency indices: A HYGARCH approach," Economics Bulletin, AccessEcon, vol. 36(4), pages 2154-2160.
    10. Mollah, Sabur & Quoreshi, A.M.M. Shahiduzzaman & Zafirov, Goran, 2016. "Equity market contagion during global financial and Eurozone crises: Evidence from a dynamic correlation analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 151-167.
    11. Murad A.Bein & Gulcay TUNA, 2015. "Volatility Transmission and Dynamic Correlation Analysis between Developed and Emerging European Stock Markets during Sovereign Debt Crisis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 61-80, June.
    12. Aboura, Sofiane & Chevallier, Julien, 2015. "Geographical diversification with a World Volatility Index," Journal of Multinational Financial Management, Elsevier, vol. 30(C), pages 62-82.
    13. repec:eee:finana:v:52:y:2017:i:c:p:9-26 is not listed on IDEAS
    14. Sohel Azad, A.S.M. & Batten, Jonathan A. & Fang, Victor & Wickramanayake, Jayasinghe, 2015. "International swap market contagion and volatility," Economic Modelling, Elsevier, vol. 47(C), pages 355-371.
    15. Vogel, Harold L. & Werner, Richard A., 2015. "An analytical review of volatility metrics for bubbles and crashes," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 15-28.
    16. repec:spr:annopr:v:266:y:2018:i:1:d:10.1007_s10479-018-2788-0 is not listed on IDEAS
    17. Pappas, Vasileios & Ingham, Hilary & Izzeldin, Marwan & Steele, Gerry, 2016. "Will the crisis “tear us apart”? Evidence from the EU," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 346-360.

    More about this item

    Keywords

    Financial contagion; Volatility index; Global financial crisis; Euro crisis; Dynamic conditional correlation;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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