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.