TY - JOUR
T1 - The predictive power of stock market's expectations volatility
T2 - A financial synchronization phenomenon
AU - Magner, Nicolás
AU - Lavin, Jaime F.
AU - Valle, Mauricio
AU - Hardy, Nicolás
N1 - Publisher Copyright:
© 2021 Magner et al. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
PY - 2021/5
Y1 - 2021/5
N2 - We explore the use of implied volatility indices as a tool for estimate changes in the synchronization of stock markets. Specifically, we assess the implied stock market's volatility indices' predictive power on synchronizing global equity indices returns. We built the correlation network of 26 stock indices and implemented in-sample and out-of-sample tests to evaluate the predictive power of VIX, VSTOXX, and VXJ implied volatility indices. To measure markets' synchronization, we use the Minimum Spanning Tree length and the length of the Planar Maximally Filtered Graph. Our results indicate a high predictive power of all the volatility indices, both individually and together, though the VIX predominates over the evaluated options. We find that an increase in the markets' volatility expectations, captured by the implied volatility indices, is a good Granger predictor of an increase in the synchronization of returns in the following month. Estimating, monitoring, and predicting returns' synchronization is essential for investment decision-making, especially for diversification strategies and regulating financial systems.
AB - We explore the use of implied volatility indices as a tool for estimate changes in the synchronization of stock markets. Specifically, we assess the implied stock market's volatility indices' predictive power on synchronizing global equity indices returns. We built the correlation network of 26 stock indices and implemented in-sample and out-of-sample tests to evaluate the predictive power of VIX, VSTOXX, and VXJ implied volatility indices. To measure markets' synchronization, we use the Minimum Spanning Tree length and the length of the Planar Maximally Filtered Graph. Our results indicate a high predictive power of all the volatility indices, both individually and together, though the VIX predominates over the evaluated options. We find that an increase in the markets' volatility expectations, captured by the implied volatility indices, is a good Granger predictor of an increase in the synchronization of returns in the following month. Estimating, monitoring, and predicting returns' synchronization is essential for investment decision-making, especially for diversification strategies and regulating financial systems.
UR - http://www.scopus.com/inward/record.url?scp=85106359126&partnerID=8YFLogxK
U2 - 10.1371/journal.pone.0250846
DO - 10.1371/journal.pone.0250846
M3 - Article
C2 - 34014976
AN - SCOPUS:85106359126
SN - 1932-6203
VL - 16
JO - PLoS ONE
JF - PLoS ONE
IS - 5 May
M1 - e0250846
ER -