An Investigation of the Predictive Speed of the UK VIX for the Downside Risk in European Equity Markets

Chikashi Tsuji

doi:10.5539/ibr.v11n12p18

Abstract

Using the time-series data of UK volatility index (VIX) and other four European equity indices of France, Italy, Spain, and Portugal, and applying quantile regressions, this study investigates the predictive power and predictive speed of the UK VIX for the future sharp price drops in other four European equity markets. As a result, our empirical examinations derive the following findings. (1) First, we clarify that the increases of the UK VIX have statistically significant predictive power for the downside risk in other four European equity markets. (2) Second, our empirical results reveal that the two to four days before, the changes in the UK VIX can forecast the downside risk in other four European equity markets.

Highlights

In the fields of business, economics, and finance, downside risk in financial markets is a highly crucial research topic and recently, many interesting studies regarding this issue have been conducted (e.g., Galsband, 2012; Reboredo and Rivera-Castro, 2014; Min and Kim, 2016; Tsuji, 2017a; Farago and Tédongap, 2018; Bernstein et al, 2018)
Using the time-series data of UK volatility index (VIX) and other four European equity indices of France, Italy, Spain, and Portugal, and applying quantile regressions, this study investigates the predictive power and predictive speed of the UK VIX for the future sharp price drops in other four European equity markets
In a globalizing and tightening international financial markets, how does downside risk in international equity markets spill over? Further, how is the speed of downside risk spillovers in international equity markets? To answer these research questions, by using the time-series data of the UK VIX and other four European equity price indices of France, Italy, Spain, and Portugal, and applying quantile regressions, this study investigates the predictive power and predictive speed of the UK volatility index (VIX) for the future sharp price drops in other European equity markets

Summary

Introduction

In the fields of business, economics, and finance, downside risk in financial markets is a highly crucial research topic and recently, many interesting studies regarding this issue have been conducted (e.g., Galsband, 2012; Reboredo and Rivera-Castro, 2014; Min and Kim, 2016; Tsuji, 2017a; Farago and Tédongap, 2018; Bernstein et al, 2018). How is the speed of downside risk spillovers in international equity markets? To answer these research questions, by using the time-series data of the UK VIX and other four European equity price indices of France, Italy, Spain, and Portugal, and applying quantile regressions, this study investigates the predictive power and predictive speed of the UK volatility index (VIX) for the future sharp price drops in other European equity markets. The use of this UK VIX is highly meaningful for conducting beneficial empirical examinations for European equity markets. The equity markets of France, Italy, Spain, and Portugal are important in Europe; and all the five countries are included in the Southern and Western Europe.

Methods

Results

Conclusion