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The Journal of Derivatives

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Article

Implied Volatility across Geographical Markets and Asset Classes

Julian P. Velev, Brian C. Payne, Jiri Tresl and Wilfredo Toledo
The Journal of Derivatives Summer 2018, 25 (4) 7-23; DOI: https://doi.org/10.3905/jod.2018.1.065
Julian P. Velev
is a full professor of physics in the department of physics at the University of Puerto Rico in San Juan, Puerto Rico. julian.velev@upr.edu
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Brian C. Payne
is an assistant professor of finance in the department of accounting and finance at the University of Colorado in Colorado Springs, CO. bpayne3@uccs.edu
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Jiri Tresl
is an assistant professor of finance in the department of finance and law at Central Michigan University in Mount Pleasant,Michigan, and a researcher at CERGE-EI at Charles University and the Academy of Sciences in Prague, Czech Republic. tresl1j@cmich.edu
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Wilfredo Toledo
is an associate professor of economics in the department of economics at the University of Puerto Rico in San Juan, Puerto Rico. wilfredo.toledo@upr.edu
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Abstract

Derivatives based on the VIX index and related indexes in the U.S. and around the world have proliferated enormously in the last few years. This article reviews the behavior of VIX-like indexes in 14 markets in 8 countries. Eleven are stock indexes, 2 are commodities, and the last is the USD–EUR exchange rate. A simple GARCH-family model for the change and volatility of the index is fitted to index returns, implied volatility (i.e., lagged IV), and the U.S. VIX (as a proxy for global volatility conditions). Separate coefficients are estimated for positive and negative variable values, which reveals that negative market returns cause sharp and immediate increases in the volatility index, but positive returns reduce implied volatility by a lesser amount and the effect is spread out over time. Including lagged factors from the previous day was important, especially for the smaller markets. The U.S. VIX was found to influence all of the other markets, thus suggesting the existence of a global volatility factor that can be proxied by the VIX, and the evidence indicates that volatility appears to spill over from the first-tier markets to the smaller ones.

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The Journal of Derivatives: 25 (4)
The Journal of Derivatives
Vol. 25, Issue 4
Summer 2018
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Implied Volatility across Geographical Markets and Asset Classes
Julian P. Velev, Brian C. Payne, Jiri Tresl, Wilfredo Toledo
The Journal of Derivatives May 2018, 25 (4) 7-23; DOI: 10.3905/jod.2018.1.065

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Implied Volatility across Geographical Markets and Asset Classes
Julian P. Velev, Brian C. Payne, Jiri Tresl, Wilfredo Toledo
The Journal of Derivatives May 2018, 25 (4) 7-23; DOI: 10.3905/jod.2018.1.065
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