Volatility contagion across commodity, equity, foreign exchange and Treasury bond markets

Abstract

Over the last years, the Chicago Board of Options Exchange (CBOE) has launched a set of implied volatility indices based on new asset classes following the success of equity-based volatility indices. Using some of the newly created volatility indices, this study shows that evidence of implied volatility transmission across commodity, equity, foreign exchange and Treasury bond markets cannot be accounted for by news announcements on economic fundamentals, suggesting volatility contagion. The findings are robust over the recent financial crisis period and the post-crisis period.

Keywords:

• implied volatility index
• volatility spillovers
• news announcements
• contagion

JEL Classification:

• F40
• G14
• G15

Funding

Raquel acknowledges the financial support provided by Ministerio de Educación y Ciencia [grant number ECO2011-28134].

Notes

¹ The CBOE and CME Group launched VXTYN in May 2013.

² Additional information on the volatility indices can be retrieved from http://www.cboe.com/micro/volatility/introduction.aspx

³ Contract specifications of options traded on the CBOE and the CME Group are provided on the websites of the exchanges.

⁴ The standardization of the surprise variable helps in comparing the effect of announcements that differ in the units of measurement.

⁵ Currently, the CBOE lists options and futures in a number of volatility indices.

⁶ According to the National Bureau of Economic Research (NBER), June 2009 is the end date of the recessionary period. See also Liu et al. (2013).

⁷ Detailed results can be obtained from the authors upon request.