DP13325 Volatility Risk Pass-Through
|Author(s):||Riccardo Colacito, Mariano Massimiliano Croce, Yang Liu, Ivan Shaliastovich|
|Publication Date:||November 2018|
|Keyword(s):||foreign exchange disconnect, Risk Sharing, Volatility pass-through|
|JEL(s):||C62, F31, G12|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13325|
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.