Asymmetric semi-volatility spillover effects in EMU stock markets
Abstract The aim of this paper is to quantify the strength and the direction of semi-volatility spillovers between five EMU stock markets over the 2000–2016 period. We use upside and downside semi-volatilities as proxies for downside risk and upside opportunities. In this way, we aim to complement the literature, which has focused mainly on the contemporaneous correlation between positive and negative returns, with the evidence of asymmetry also in semi-volatility transmission. For this purpose, we apply the Diebold and Yilmaz (2012) methodology, based on a generalized forecast error variance decomposition, to downside and upside realized semi-volatility series. While the analysis of Diebol…
Risk aversion connectedness in five European countries
Abstract In this paper we compute an aggregate index of risk aversion and indices of vulnerability and the contribution to systemic risk aversion for five European countries. The variance risk premium proxies risk aversion. The contribution to the literature is twofold. First, this is the first study estimating not only the common component, but also indices of directional connectedness among variance risk premia. Second, it is the first to estimate the interconnections by means of a FIVAR model, in order to account for long memory. Our analysis indicates measures of total and directional connectedness unlike those that would be obtained with the use of a short memory VAR. These differences…
Volatility co-movements: a time-scale decomposition analysis
In this paper, we are interested in detecting contagion from US to European stock market volatilities in the period immediately after the Lehman Brothers collapse. The analysis is based on a factor decomposition of the covariance matrix, in the time and frequency domain, using wavelets. The analysis aims to disentangle two components of volatility contagion (anticipated and unanticipated by the market). Once we focus on standardized factor loadings, the results show no evidence of contagion (from the US) in market expectations (coming from implied volatility) and evidence of unanticipated contagion (coming from the volatility risk premium) for almost any European country. Finally, the estim…
How do normalization schemes affect net spillovers? A replication of the Diebold and Yilmaz (2012) study
Abstract This paper replicates the Diebold and Yilmaz (2012) study on the connectedness of the commodity market and three other financial markets: the stock market, the bond market, and the FX market, based on the Generalized Forecast Error Variance Decomposition, GEFVD. We show that the net spillover indices (of directional connectedness), used to assess the net contribution of one market to overall risk in the system, are sensitive to the normalization scheme applied to the GEFVD. We show that, considering data generating processes characterized by different degrees of persistence and covariance, a scalar-based normalization of the Generalized Forecast Error Variance Decomposition is pref…
Volatility risk premia and financial connectedness
In this paper we use the Diebold Yilmaz (2009 and 2012) methodology to construct an index of connectedness among five European stock markets: France, Germany, UK, Switzerland and the Netherlands, by using volatility risk premia. The volatility risk premium, which is a proxy of risk aversion, is measured by the difference between the implied volatility and expected realized volatility of the stock market for next month. While Diebold and Yilmaz focus is on the forecast error variance decomposition of stock returns or range based volatilities employing a stationary VAR in levels, we account for the (locally) long memory stationary properties of the levels of volatility risk premia series. The…