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We use quantile regression to investigate the short‐term return‐volatility relation between stock index returns and changes in implied volatility index. Neither the leverage hypothesis nor the volatility feedback hypothesis effectively explains the asymmetric return‐volatility relation. Instead, behavioral explanations, such as the affect and representativeness heuristics, are supported by our results, particularly in the short‐term; the affect heuristic plays an important role. Moreover, in the context of an extreme volatility change distribution, the affect heuristic and time‐pressure dominate. Thus, we observe strong negative and asymmetric relations between each volatility index and its corresponding stock market index. The asymmetry increases monotonically from the median quantile to the uppermost quantile (i.e., 95%); therefore, ordinary least squares (OLS) regression underestimates this relation at upper quantiles. Additionally, the VIX presents the highest asymmetric return‐volatility relation, followed by the VSTOXX, VDAX, and VXN. Finally, the observed asymmetry is more pronounced with the new volatility index measure than with the old, at‐the‐money volatility index measure. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:235–265, 2013

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This paper examines the volatility linkages among the fear index (VIX), the developed stock market volatility index (VXEFA), and the emerging stock market volatility index (VXEEM). We find significant cross-market dependencies in first as well as in second moments of volatilities. The fear index has leading role and has information content for both developed and emerging markets. A volatility shock to the fear index spillovers to the developed and emerging markets and able to explain about 57.07% and 63.77% of their unexpected volatility shocks, respectively; the effect of the shock persists for about 7 days. We further analyse the cross-market dependencies in second moments of volatilities and find that the correlations among the markets are time-varying not constant. Both developed and emerging markets are highly correlated with the fear index, and the fear index drives the correlation dynamics of the emerging markets. The dynamic correlations increase in turbulent periods and decreases in tranquil periods. Our findings have important implications for the international portfolio diversification, hedging and risk management.