Spreading the Fear : The Central Role of CBOE VIX in Global Stock Market Uncertainty

Construction of efficient portfolios is reliant on understanding the correlation between assets. If correlations change markedly during times of economic turmoil then investors are exposed to greater than desired risk levels at the most inopportune time. We examine the linkages between global stock markets using measures of market uncertainty (implied volatility). Using daily changes in G7 and BRIC implied volatility measures, over a 17-year sample period, we demonstrate that uncertainty in U.S. markets plays a pivotal role in global stock market uncertainty. “Fear is spread” across markets, as heightened uncertainty in U.S. markets is transmitted across global markets. Conversely, global markets do not appear to explain innovations in U.S. market uncertainty. We also report some evidence of market uncertainty linkages between European markets. Our results should provide some reassurance for investors in the sense that inter-dependencies do not appear to change in any meaningful way during the financial crisis of 2008-09 or the 2020 COVID-19 pandemic