TITLE:
On the Linkages between India VIX and US Financial Stress Index
AUTHORS:
Amanjot Singh
KEYWORDS:
Financial Stress, India, Linkages, US, VIX
JOURNAL NAME:
Theoretical Economics Letters,
Vol.6 No.1,
February
4,
2016
ABSTRACT: The present study is the first of its kind accounting for linkages among
India VIX and US financial stress index by employing vector autoregression
model (VAR), Granger causality test, generalized impulse response functions, variance
decomposition analysis (VDA) and Diebold and Yilmaz’s (2009) spillover index
highlighting the impact of cross market variations on each other. The span of
monthly data ranges from 2009 to 2015, particularly after the global financial
crisis. The results report a unidirectional causality running from the US
financial stress to the Indian equity market implied volatility. When a shock
is subject to the US financial stress, then the response of implied volatility
in the Indian equity market is positive initially, approaching zero after a few
months. On an average, 32% of the variations are accounted by cross market
shocks whereas rest of the variations are as a result of own market shocks. The
contribution of the US financial stress to forecasted error variances in the
Indian equity market implied volatility increases over a period of 10 months to
25% approximately. The results have strong implications for the Indian equity
market investors.