Assessing Volatility Indicators: The Benefit of Local Equity Volatility Indices [extrait BMI 124]

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We use three non-parametric volatility estimators ? option-implied, realized, and crosssectional ? to test for presence of a local volatility factor in 8 different markets. Through a regression model, we confirm the presence of a strong local volatility factor influencing the local market return detectable with the three estimators. Using a principal component analysis, we demonstrate that the global volatility factor is not the US volatility but a global factor with a dominant non-Asian exposure. An Asian volatility factor appears to be of second-order importance and, finally, a US factor appears only with option-implied volatility and is of third-order importance. From a practical perspective, our analysis suggests that a US volatility indicator cannot be taken as a sufficient risk statistics for regional equity markets. As a consequence, it appears that the development of local volatility indices is needed to contribute to the ability for investors to measure and manage uncertainty about volatility across international equity markets.JEL Classification: G11, G15Keywords: volatility indices, volatility derivatives, volatility risk, regional volatility factors, global volatility factor.

Auteurs :Loh Lixia
Extrait de la revue BMI 124