US Implied Volatility as A predictor of International Returns

Mehmet F. Dicle; Mehmet F. Dicle

doi:10.3934/QFE.2017.4.388

Quantitative Finance and Economics

2017, Volume 1, Issue 4: 388-402. doi: 10.3934/QFE.2017.4.388

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Research article Special Issues

US Implied Volatility as A predictor of International Returns

Mehmet F. Dicle ^,

Loyola University New Orleans, College of Business, 6363 St. Charles Avenue, Box 15, NewOrleans, LA 70118, USA

Received: 03 August 2017 Accepted: 06 November 2017 Published: 13 December 2017

This study provides evidence of the US implied volatility's e ect on international equity markets' returns. This evidence has two main implications: ⅰ) investors may find that foreign equity returns adjusting to US implied volatility may not provide true diversification benefits, and ⅱ) foreign equity returns may be predicted using US implied volatility. Our sample includes US volatility index (VIX) and major equity indexes in twenty countries for the period between January, 2000 through July, 2017. VIX leads eighteen of the international markets and Granger causes seventeen of the markets after controlling for the S & P-500 index returns and the 2007/2008 US financial crisis. US investors looking to diversify US risk may find that international equities may not provide intended diversification benefits. Our evidence provides support for predictability of international equity returns based on US volatility.
- diversification,
- implied volatility,
- VIX,
- forecasting
Citation: Mehmet F. Dicle. US Implied Volatility as A predictor of International Returns[J]. Quantitative Finance and Economics, 2017, 1(4): 388-402. doi: 10.3934/QFE.2017.4.388

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Abstract

This study provides evidence of the US implied volatility's e ect on international equity markets' returns. This evidence has two main implications: ⅰ) investors may find that foreign equity returns adjusting to US implied volatility may not provide true diversification benefits, and ⅱ) foreign equity returns may be predicted using US implied volatility. Our sample includes US volatility index (VIX) and major equity indexes in twenty countries for the period between January, 2000 through July, 2017. VIX leads eighteen of the international markets and Granger causes seventeen of the markets after controlling for the S & P-500 index returns and the 2007/2008 US financial crisis. US investors looking to diversify US risk may find that international equities may not provide intended diversification benefits. Our evidence provides support for predictability of international equity returns based on US volatility.

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