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Understanding Global Volatility Accessible Data
Table 1
Table 1 shows the unconditional correlation between the global volatility and the option-implied volatility of the following countries' representative indexes: the United States, Germany, Japan, the United Kingdom, and Switzerland. The table also show the correlation between the implied volatility of each pair of countries.
Figure 1
Figure 1 shows the time series of the 30-day option-implied volatility for the representative index of the United States (solid blue line), Germany (dashed orange), Japan (dotted green), and the United Kingdom (dot-dashed black) between January 2003 and August 2017. To illustrate the effect of key developments on all countries’ volatility, we mark the following events (vertical lines): the collapse of Lehman Brothers on September 2008, the announcement of the bailout of Spain and Italy on June 2012, and March 2015, when concerns about China’s economic slowdown dominated the headlines. Option-implied volatilities tend to track each other closely and range from 6.2 percent to up to 91.5 percent. The maximum values of option-implied volatilities for this sample occur around the collapse of Lehman Brothers.
Figure 2
Figure 2 shows the portion of the 6-month ahead forecast error variance of global volatility (left bar) and the VIX (right bar) explained by the following sets of variables: U.S. variables excluding monetary policy (lower portion of the bars in blue, 9.6 percent for Global volatility and 10.5 percent for the VIX), U.S. monetary policy (mid portion in orange, 3.7 percent for Global volatility and 10.5 percent for the VIX), and global variables (upper portion in grey, 20.1 percent for Global volatility and 18.4 percent for the VIX).
Figure 3
Figure 3 shows the out-of-sample forecast of the global implied volatility (left panel) and the VIX (right panel) when the fundamentals drivers are known each period. The solid blue line shows the time series of the observed time series. Global volatility was near 20 percent at the end of 2015, close to its mean value over the period from 2000 to 2017, but by mid-2017 it had almost halved. The dashed orange line shows the out-of-sample forecast for the U.S. model without monetary policy, the dotted green line shows the forecast for the U.S. with monetary policy model, and the dot-dashed black line shows the forecast for the model with all variables (global model). The U.S. model without monetary policies does a poor job of matching the recent behavior of volatility. The U.S. with monetary policy model does a somewhat better job, but it is the global model that best explains the reduction in both global volatility and the VIX since January 2016. In fact, the global model would suggest that neither global volatility nor the VIX are unexpectedly low once the effects of global variables and U.S. monetary policies are taken into account.
Figure 4
Figure 4 shows the out-of-sample forecast of the global realized volatility, which is calculated as the market-value-weighted average of all countries’ realized volatility, when the fundamentals drivers are known each period. The solid blue line shows the time series of the observed time series, the dashed orange line shows the out-of-sample forecast for the U.S. model without monetary policy, the dotted green line shows the forecast for the U.S. with monetary policy model, and the dot-dashed black line shows the forecast for the model with all variables (global model). As for global volatility and the VIX, global variables, on top of U.S. monetary policies, explain well the reduction in global realized volatility.