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Fear connectedness among asset classes

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  • Julián Andrada-Félix
  • Adrian Fernandez-Perez
  • Simón Sosvilla-Rivero

Abstract

This study investigates the interconnection between five implied volatility indices representative of different financial markets during the period 1 August 2008–29 December 2017. 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 Yilmaz. Second, we make use of a dynamic analysis to evaluate both the net directional connectedness for each market and all net pairwise directional connectedness. Our results suggest that a 38.99%, of the total variance of the forecast errors is explained by shocks across markets, indicating that the remainder 61.01% 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. Finally, we also document frequently switch between a net volatility transmitter and a net volatility receiver role in the five markets under study.

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  • Julián Andrada-Félix & Adrian Fernandez-Perez & Simón Sosvilla-Rivero, 2018. "Fear connectedness among asset classes," Applied Economics, Taylor & Francis Journals, vol. 50(39), pages 4234-4249, August.
  • Handle: RePEc:taf:applec:v:50:y:2018:i:39:p:4234-4249
    DOI: 10.1080/00036846.2018.1441521
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