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Contemporaneous Spill-Over Among Equity, Gold, and Exchange Rate Implied Volatility Indices

Authors

  • Ihsan Ullah Badshah,

    1. Ihsan Ullah Badshah is at the Auckland University of Technology and an Affiliate Member of the Auckland Centre for Financial Research, Auckland, New Zealand
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  • Bart Frijns,

    Corresponding author
    • Bart Frijns is at the Auckland University of Technology and a Fellow of the Auckland Centre for Financial Research, Auckland, New Zealand
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  • Alireza Tourani-Rad

    1. Alireza Tourani-Rad is at the Auckland University of Technology and a Fellow of the Auckland Centre for Financial Research, Auckland, New Zealand
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  • We would like to thank Robert Webb, the editor, Doojin Ryu, and the participants at the 8th Annual Conference of Asia-Pacific Association of Derivatives, 2012, Busan, Korea, and the 25th Australasian Finance and Banking Conference, 2012, Sydney, Australia for their useful comments and suggestions.

Correspondence author, Department of Finance, Auckland University of Technology, Private Bag 92006, 1020 Auckland, New Zealand. Tel: +64 9 921 5706, Fax: +64 9 921 9940, e-mail: bfrijns@aut.ac.nz

Abstract

This paper examines the contemporaneous spill-over effects among the implied volatility indices for stocks (VIX), gold (GVZ), and the exchange rate (EVZ). Using the “identification through heteroskedasticity” approach of Rigobon (2003), we decompose the contemporaneous relationships between these indices into causal relationships. We find strong unidirectional spill-over from VIX to GVZ and EVZ (increases in VIX lead to increases in GVZ and EVZ); and bi-directional spill-over between GVZ and EVZ. The impulse responses of our structural VAR suggest that the traditional VAR seriously overestimates the impulse responses for GVZ and EVZ. These findings have important implications for portfolio and risk management.

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