European ‘fear’ indices

Abstract

European volatility indices exhibit time-varying behavior consistent with three distinct volatility regimes. The regime changes tend to be driven by large past changes in stock prices and volatility. The chapter also documents important differences across European markets in terms of responsiveness of country’s stock market returns to implied volatility. For example, the German stock market tends to be more responsive to changes in implied volatility compared to the UK stock market. The results are in line with cultural differences and lend support to behavioral explanations of the stock return–implied volatility relation. The degree of integration between the leading volatility markets (Germany, UK, France), however, is very high and shocks on the volatility spread between these countries die out within three days.