Spillovers and Transmission in Emerging and Mature Markets Implied Volatility Indices

Abstract

The present study examine implied volatility spillover and transmission between emerging (India) and mature stock markets (US, France, Germany and Switzerland), measured by their respective implied volatility indices i.e. IVIX, VIX, VCAC, VDAX and VSMI. The asymmetries in Implied Volatility (IV) indices of selected countries are examined using Engle and Ng (1993) test. The spillovers and transmission are examined in multivariate-GARCH framework using BEKK and DCC model. The analysis is done using weekly data for period spanning from Nov, 2007 to Oct, 2011 March. The main findings of study document asymmetries in the IV indices exist for the Indian, American and French markets. The BEKK-GARCH model results show that conditional variances of implied VI of India, Germany, French and Switzerland strongly affected by their own past shocks and volatility effects. The DCC model reveals that there is a moderate-level of correlation between the selected markets. The results of the present study can be used by the portfolio managers and market participant for yielding the diversification benefits in short-run by including IV indices as an asset in their portfolio.

Keywords: Implied Volatility Index, Indian Stock Market, BEKK-GARCH, DCC, VIX, VSMI

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