The study of volatility spillovers and transmission between international stock markets has
assumed greater importance as it is essential to understand the mechanism of market
integration, economic cycles and financial crises. Market integration in terms of implied
volatility spillovers has been an issue of growing interest in recent times especially in the
aftermath of events like the Asian and Russian crises at the end of 1990s, the subprime crises
in 2008, eurozone crises and Chinese crises in 2015.
Implied volatility is a forward looking measure. It is the volatility imbedded in the option
prices and acts as a futuristic measure of expected volatility and helps in the assessment of
risk over a given period of time (Stewart, 1995). Thus, as it is revealed in all the previous
literature, the information content of implied volatility is far superior over ex post, i.e., historical
measures of volatility. The Chicago Board of Options Exchange (CBOE) was the first to
introduce implied volatility index in 1993. It was based on the S&P 100 index options, but in
the year 2003, the computation methodology of VIX was revised and the new VIX was based
on the S&P 500 index options. Soon the VIX became a benchmark for measuring volatility in the US market. Following the footsteps of CBOE, many financial markets soon introduced
their own volatility index (Narwal et al., 2011). In India, the IVIX was introduced by NSE in
the year 2008. It was based on the methodology of the US VIX. The volatility index is often
termed as ‘the investor fear gauge’ as it indicates what volatility investors expect to see in the
next 30 days. Further, a negative contemporaneous relationship is observed between the
underlying index and the volatility index in different financial markets. Thus, the volatility
index can be considered as the world’s premier barometer of investor sentiments and market
volatility (Narwal et al., 2011).
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