Interactions between United States (VIX) and United Kingdom (VFTSE) Market Volatility: A Time Series Study

Jacob Friar

Paper prepared for EC-491 Quantitative Methods in Economics.

Abstract

Financial markets have become increasingly more dependent on calculated measures of volatility. Many of the leading economies have developed their own indices that reflect the expectations of market volatility, including the United States (VIX) and the United Kingdom (VFTSE). This study uses these two indices in particular to conduct a time series analysis as a means to identifying potential relationships between the value of the VIX and VFTSE, over time. The analysis concludes that there is a two-way relationship between the indices, and therefore the VAR Model was implemented. Further evaluation of the impulses reveals that while values of each index affect the other, past values of a given index also affects itself. These results could have implications on the direction of expected volatility in the US and UK markets following dramatic changes to the VIX and VFTSE indices.

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Apr 20th, 1:00 PM Apr 20th, 3:00 PM

Interactions between United States (VIX) and United Kingdom (VFTSE) Market Volatility: A Time Series Study

University Commons

Financial markets have become increasingly more dependent on calculated measures of volatility. Many of the leading economies have developed their own indices that reflect the expectations of market volatility, including the United States (VIX) and the United Kingdom (VFTSE). This study uses these two indices in particular to conduct a time series analysis as a means to identifying potential relationships between the value of the VIX and VFTSE, over time. The analysis concludes that there is a two-way relationship between the indices, and therefore the VAR Model was implemented. Further evaluation of the impulses reveals that while values of each index affect the other, past values of a given index also affects itself. These results could have implications on the direction of expected volatility in the US and UK markets following dramatic changes to the VIX and VFTSE indices.