Abstract
The present study is the first of its kind accounting for linkages among India VIX and US financial stress index by employing vector autoregression model (VAR), Granger causality test, generalized impulse response functions, variance decomposition analysis (VDA) and Diebold and Yilmaz’s (2009) spillover index highlighting the impact of cross market variations on each other. The span of monthly data ranges from 2009 to 2015, particularly after the global financial crisis. The results report a unidirectional causality running from the US financial stress to the Indian equity market implied volatility. When a shock is subject to the US financial stress, then the response of implied volatility in the Indian equity market is positive initially, approaching zero after a few months. On an average, 32% of the variations are accounted by cross market shocks whereas rest of the variations are as a result of own market shocks. The contribution of the US financial stress to forecasted error variances in the Indian equity market implied volatility increases over a period of 10 months to 25% approximately. The results have strong implications for the Indian equity market investors.
Highlights
Numerous studies have tried to capture the impact of one financial market on another over the years
32% of the variations are accounted by cross market shocks whereas rest of the variations are as a result of own market shocks
The present study attempts to account for linkages among the US financial stress index and Indian equity market implied volatility index across the years 2009 to 2015 by employing diverse econometric models
Summary
Numerous studies have tried to capture the impact of one financial market on another over the years. The present study is an attempt to capture and quantify empirical linkages among India VIX (provided by National Stock Exchange of India Ltd) and US financial stress index, i.e. Kansas City Financial Stress Index (KFSI) across the time period 2009 to 2015, after the global financial crisis. Through the present study, an attempt has been made to comprehend the linkages that exist between the US financial stress and India VIX index. Our fundamental objective is to check that whether the stress prevailing in the US financial system has an impact on Indian equity market volatility through diverse transmission mechanisms like international capital flows, real linkages or overall financial linkages in empirical terms. The study is the first of its kind capturing linkages among the US financial stress index and Indian equity market volatility index after the financial crisis. The rest of the paper is organized as follows: Section 2 spotlights empirical framework; Section 3 presents empirical findings and Section 4 concludes the paper along with implications
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
