Dynamic Linkages between Implied Volatility Indices of Developed and Emerging Financial Markets: An Econometric Approach

Abstract

Since 2008, the financial systems around the world have been hit by a series of financial crisis from burst housing bubbles and crippling unemployment to unsustainable debt levels and volatile financial markets. An important measure to assess the market expectation of the future volatility of underlying asset is the implied volatility index (IVI). The main objective of the article is to examine the IVI linkages between developed financial markets (US, UK and Japan) and emerging financial markets (BRIC—Brazil, Russia, India and China) and to conclude about the degree of integration between these markets. The data consist of daily closing prices of stock index options between April 2010 and March 2013. The methodology involves the augmented Dickey–Fuller (ADF) test, unit root test, vector autoregressive (VAR) modelling and variance decomposition. The results of the study suggest that the US IVI has substantial impact over the variations of other IVIs, thus raising the possibility of it constituting a usable risk factor for investors internationally.