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Volatility Risk Pass-Through

Author

Listed:
  • Riccardo Colacito
  • Mariano M Croce
  • Yang Liu
  • Ivan Shaliastovich

Abstract

We develop a novel measure of volatility pass-through to assess international propagation of output volatility shocks to macroeconomic aggregates, equity prices, and currencies. An increase in country’s output volatility is associated with a decrease in its output, consumption, and net exports. The average consumption pass-through is 50% (a 1% increase in output volatility increases consumption volatility by 0.5%) and it increases to 70% for shocks originating in smaller countries. The equity volatility pass-through is larger and in the order of 90%. A novel channel of risk sharing of volatility risks can explain our empirical findings.

Suggested Citation

  • Riccardo Colacito & Mariano M Croce & Yang Liu & Ivan Shaliastovich, 2022. "Volatility Risk Pass-Through," The Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2345-2385.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:5:p:2345-2385.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab096
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    More about this item

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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