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Does the world smile together? A network analysis of global index option implied volatilities

Chen, Jing, Han, Qian, Ryu, Doojin and Tangd, Jing 2022. Does the world smile together? A network analysis of global index option implied volatilities. Journal of International Financial Markets, Institutions and Money 77 , 101497. 10.1016/j.intfin.2021.101497
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This study uses directed acyclic graph and spillover index models to find significant evidence of both implied volatility contagion and spillovers. First, we observe strong regional clustering among the implied volatility smiles of global markets. European and American options markets form a separate contemporaneous contagion cluster from markets in the Asia-Pacific region. However, no market is completely independent from the markets in the other two regions in the long run. The European index options markets demonstrate the strongest implied volatility smile contagion. Second, we observe the heterogeneity across different markets in terms of implied volatility spillover, and extreme market conditions, such as crises, seem to intensify the spillover effects. The trend in the short-run underlying index return, the implied volatility of at-the-money options, and the interest rate term spread are key determinants of implied volatility spillovers.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Mathematics
Publisher: Elsevier
ISSN: 1042-4431
Date of First Compliant Deposit: 6 January 2022
Date of Acceptance: 21 December 2021
Last Modified: 05 Jul 2022 18:30

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