The contagion effects of volatility indices across the U.S. and Europe

Abstract

This research adopts an autoregressive conditional jump intensity (ARJI) model by utilizing intraday data of overlapping trading hours to analyze the global contagion effects of sentimental responses and volatility dynamics through the volatility indices of the U.S. and three major European countries. The results show strong evidence of contagion effects among the volatility indices. For regional effects, compared to the other two European indices (VFTSE and VCAC), the volatility index of Germany (VDAX) generates greater impacts on the other indices, and we also observe bi-directional causalities among these three countries. The findings support the meteor shower hypothesis among the sample countries. Additionally, jump innovations in Germany affect investor sentiments with the fastest convergence speed. Finally, the jump convergence speed in the UK is slower, and the impacts of unexpected news could also last longer for UK investors.