How does fear spread across asset classes? Evidence from quantile connectedness

Abstract

Purpose This study aims to investigate the connectivity among four principal implied volatility (“fear”) markets in the USA. Design/methodology/approach The empirical analysis relies on daily data (“fear gauge indices”) for the period 2017–2023 and the quantile vector autoregressive (QVAR) approach that allows connectivity (that is, the network topology of interrelated markets) to be quantile-dependent and time-varying. Findings Extreme increases in fear are transmitted with higher intensity relative to extreme decreases in it. The implied volatility markets for gold and for stocks are the main risk connectors in the network and also net transmitters of shocks to the implied volatility markets for crude oil and for the euro-dollar exchange rate. Major events such as the COVID-19 pandemic and the war in Ukraine increase connectivity; this increase, however, is likely to be more pronounced at the median than the extremes of the joint distribution of the four fear indices. Originality/value This is the first work that uses the QVAR approach to implied volatility markets. The empirical results provide useful insights into how fear spreads across stock and commodities markets, something that is important for risk management, option pricing and forecasting.