Volatility indices: An international comparison

Abstract

Volatility index is a measure of markets expectation of volatility over the near-term. It is a forward looking instrument and depicts the expected market volatility over the next 30 days. The constant ups and downs in the financial markets are a cause of concern for most investors. Thus, the volatility index helps them to keep track of market volatility and guide them in their investment decisions. The objective of this paper is to understand the dynamics of linkages between the volatility indices of US (VIX), Germany (VDAX), India (VIX), South Korea (VKOSPI) and China (VXFXI). The VAR model with impulse response function and variance decomposition analysis has been used to understand the linkage dynamics. The results suggest that the US VIX is the most influential index. Therefore, this index should be closely observed by overseas regulatory authorities as early warning signal for future turbulence in their domestic markets. The results for the Indian VIX reveal that there is a moderate level of influence of the US index on it. Further, the Indian VIX seems to be integrated minimally with its Asian equivalents.