Time connectedness of fear

Abstract

This paper examines the interconnection between four implied volatility indices representative of the investors' consensus view of expected stock market volatility at different maturities during the period from 3 January 2011 to 4 May 2018. To this end, we first perform static analysis to measure the total volatility connectedness in the entire period using a framework proposed by Diebold and Yilmaz (J Econ 182: 119–134, 2014). Second, we apply a dynamic analysis to evaluate both the net directional connectedness for each market using the TVP-VAR connectedness approach developed by Antonakakis and Gabauer (Refined measures of dynamic connectedness based on TVP-VAR. MPRA, Working Paper No. 78282, 2017). Our results suggest that 72.27% of the total variance of the forecast errors is explained by shocks across the examined maturities, indicating that the remainder 27.73% 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. Our results are robust to control by macroeconomic and uncertainty factors, and persistent across US and European implied volatility indices.