The Local Volatility Factor For Asian Stock Markets

Summary:

The study finds strong evidence for a very significant local volatility factor in the Asian market index returns. In particular, the analysis reveals that the relationship between the Asian equity index returns and the Asian model-free option-implied (MFOI) volatility indices is significantly stronger than the relationship between Asian equity index returns and VIX. The analysis suggests either a weaker or insignificant relationship between the Asian equity market returns and the US VIX in the presence of Asian volatilities, implying that the Asian volatility indices can absorb the information content of the VIX. This research calls into question the conclusions of previous academic studies and especially the popular idea with professionals that in a period of strong turbulence the recorrelation of the markets and their volatility would suggest the use of a very liquid contract like the VIX futures, which would thereby play a role of global protection against the strong risks of volatility, whatever the portfolios’ geographical exposure.