Implied volatility term structure linkages between VDAX, VSMI and VSTOXX volatility indices
This study presents new evidence on stock market integration by investigating the implied volatility term structure linkages between the newly introduced VDAX, VSMI, and VSTOXX volatility indices. The study is motivated by the traditional stock market studies of integration, which show that stock markets are highly integrated. How integrated these European markets are with respect to expectations of the future development of implied volatilities, as measured by implied volatility term structures, is an empirical question investigated in this study. The results of this study demonstrate that the estimated volatility term structures are highly correlated, indicating that they are closely linked to each other. The results of the variance decomposition analysis further show that a large proportion of the forecast variance of the term structure of the SMI and the STOXX can be explained by the term structure of the DAX. Thus, volatility prediction methods can be improved by taking into account the innovations of the implied volatility term structure of the DAX.
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