Fear connectedness among asset classes

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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.
The authors wish to thank two anonymous referees and the editor for their helpful comments and suggestions on a previous draft of this article, which have enabled us to introduce substantial improvements. Julián Andrada-Félix gratefully acknowledges warm hospitality and financial support of the Department of Finance at the Auckland University of Technology during his research visit. Simón Sosvilla-Rivero thanks the members of the Department of Economics at the University of Bath for their warm hospitality during his research visit.