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Discussion Paper Details

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Title: Volatility Risk Pass-Through

Author(s): Riccardo Colacito, Mariano Massimiliano Croce, Yang Liu and Ivan Shaliastovich

Publication Date: November 2018

Keyword(s): foreign exchange disconnect, Risk Sharing and Volatility pass-through

Programme Area(s): Financial Economics and International Macroeconomics and Finance

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 90%, whereas the link between volatility of currency and fundamentals is weak. A novel channel of risk sharing of volatility risks can explain our empirical findings.

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Bibliographic Reference

Colacito, R, Croce, M, Liu, Y and Shaliastovich, I. 2018. 'Volatility Risk Pass-Through'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13325