Dynamic Responses of Major Equity Markets to the US Fear Index

Bahram Adrangi,Arjun Chatrath,Kambiz Raffiee,Joseph Macri

doi:10.3390/jrfm12040156

Bahram Adrangi, Arjun Chatrath + Show 2 more

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https://doi.org/10.3390/jrfm12040156

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Abstract

This study examines the reaction of four major equity markets of the world to the US equity market fear index, i.e., the Chicago Board of Trade Volatility Index (VIX). The VIX is designed to perform as a leading indicator of the volatility in equity markets. Our paper examines the daily data for the period of 2013 through 2018. We find that during this period there were three significant breaks in the data. Impulse responses from the structural vector autoregressive model estimation show that, in the first and second subperiods that cover from 6/2013 through 5/2016, equity market volatility in the US, UK, France, and Germany responded to structural shocks to the VIX. Nonlinear Granger causality tests confirm these findings. However, in the post Brexit-vote era, equity indices neither react to VIX structural shocks nor are caused by these shocks.

Highlights

This paper examines the response of international equity markets to the S&P 500 implied volatility, the Chicago Board of Trade Volatility Index (VIX)
The time series plot of the VIX reveals that, while the index may be stationary during certain subsets of the period under study, structural breaks are visible
The objective of this study is to examine the reaction of four major equity markets of the world to the US fear index, the VIX

Summary

Introduction

This paper examines the response of international equity markets to the S&P 500 implied volatility, the Chicago Board of Trade Volatility Index (VIX). It is well established that the VIX is, typically, negatively related to the performance of the market, being especially high when the market turns sharply negative. The VIX is often regarded as the fear index within the US. The extent to which it correlates to other major markets has been researched to a lesser extent. The distortions arising from potential structural breaks in the VIX–market performance relationship have not been well attended to in the literature. This paper aims to provide evidence to this end

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