Do global markets imply common fear?

By examining the characteristics and dynamics of the US VIX and the European VSTOXX between January 1999 and January 2016, this research first sheds more light on their calculation methodology. Then, the econometric analysis investigates the relations of these two volatility indices with some financial variables that are expected to be their main determinants. We find that US and European stock and volatility markets exhibit a statistically significant contemporaneous negative relationship, which is slightly less pronounced for European than US indices. Due to the asymmetric relationship between equity and volatility markets, VIX and VSTOXX have wider changes when stock prices go down, relative to the case in which stock prices rise. By examining the dynamic interaction between volatility indices and main financial and macroeconomic variables, we conclude that the US monetary policy rate is an important driver of the US and European volatility indices’ behavior.