The Global Implied Volatility Surface, Convexity, and Common Predictability of International Equity Premia

We construct a global implied volatility surface by combining information from the index options of twenty countries and regions. The convexity of the global surface positively predicts equity premia around the world, in- and out-of-sample, at horizons from one to twelve months. Semi-annually, R2 are 14.4% for S&P500 and 8.8% for twenty indexes on average, increasing to 20.8% and 11.4% out-of-sample. For U.S. forecasts, global convexity subsumes other option-based predictors, including global level and slope, U.S. convexity, VIX, SVIX, variance risk premium, and left-tail volatility. The predictability of global convexity comes from its left-tail contributions related to crash fears (left-tail volatility), and right-tail contributions related to speculative demand (short-sales and funding conditions). Our findings highlight the importance of global options markets for risk sharing and information aggregation