DO GLOBAL MARKETS IMPLY COMMON FEAR?

This research investigates the relations of the US VIX and the European VSTOXX, on the one hand, and their main determinants, on the other hand. In line with prior studies, US and European stock and volatility markets exhibit a contemporaneous negative relationship. Furthermore, the increase of VIX and VSTOXX associated with a fall in stock prices is larger than the decrease that the two indices experience when stock prices rise. During the great financial crisis, the negative relation between volatility indices and stock market indices weakens for both financial markets; the asymmetric reaction to changes in stock market returns becomes stronger for the VSTOXX index and decreases for the VIX. The analysis of the dynamic interaction between volatility indices and main financial and macroeconomic variables based on a Structural Panel Bayesian VAR shows that the US monetary policy rate is an important driver of both the US and European volatility indices' behavior, thus hugely affecting not only the domestic financial market, but also the European one. Moreover, the presence of consistent co-movements and interdependencies among volatility indices prove that international spillovers are mainly linked via financial markets.