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Asymmetric implied market volatility and terrorist attacks

Author

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  • Bevilacqua, Mattia
  • Morelli, David
  • Uzan, Paola Sultana Renée

Abstract

This paper studies the impact of terrorism on implied volatility in the U.S. financial market via an event study methodology. We decompose the options-based and forward looking VIX index into its negative (VIX−) and positive (VIX+) components, extracted only from put options and call options, respectively. This decomposition of the VIX index allows us to better investigate the asymmetric impact of terrorist attacks on implied volatility from the puts and calls channels separately. Our study finds evidence of a greater impact of terror detected for the puts channel of VIX, namely VIX−. We further show that events that occur within the U.S. appear to impact both VIX and VIX− in a similar way, whereas international terrorist attacks show a greater impact on the puts component, VIX−. The calls component, VIX+, is found to be mainly detached from terrorist attacks.

Suggested Citation

  • Bevilacqua, Mattia & Morelli, David & Uzan, Paola Sultana Renée, 2020. "Asymmetric implied market volatility and terrorist attacks," International Review of Financial Analysis, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:finana:v:67:y:2020:i:c:s1057521919303187
    DOI: 10.1016/j.irfa.2019.101417
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    Citations

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    Cited by:

    1. Bevilacqua, Mattia & Morelli, David & Uzan, Paola Sultana Renée, 2021. "Striking the implied volatility of US drone companies," International Review of Financial Analysis, Elsevier, vol. 77(C).
    2. Liu, Qing & Wang, Shouyang & Sui, Cong, 2023. "Risk appetite and option prices: Evidence from the Chinese SSE50 options market," International Review of Financial Analysis, Elsevier, vol. 86(C).
    3. Omar, Ayman M.A. & Lambe, Brendan J & Wisniewski, Tomasz Piotr, 2021. "Perceptions of the threat to national security and the stock market," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 504-522.
    4. Le, Anh-Tuan & Tran, Thao Phuong, 2021. "Does geopolitical risk matter for corporate investment? Evidence from emerging countries in Asia," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    5. Wang, Xueting & Wang, Man & Wu, Haoran, 2024. "Geopolitical risk and corporate cash Holdings in China: Precautionary motive and agency problem perspectives," International Review of Financial Analysis, Elsevier, vol. 93(C).
    6. Linyu Wang & Yifan Ji & Zhongxin Ni, 2024. "Which implied volatilities contain more information? Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1896-1919, April.
    7. Lin Chen & Fengyun Mu, 2021. "Spatiotemporal characteristics and driving forces of terrorist attacks in Belt and Road regions," PLOS ONE, Public Library of Science, vol. 16(3), pages 1-24, March.

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