Forecasting Large Price Declines of the Nikkei Using the S&P 500 Implied Volatility

Abstract

This paper empirically examines the forecast power of the previous day's US implied volatility for large declines of the Nikkei by using several versions of quantile regression models. All our empirical results suggest that the previous day's US S&P 500 implied volatility has forecast power for large price drops of the Nikkei 225 in Japan. Since we repeatedly and carefully tested the several left tail risks in price changes of the Nikkei and we also tested by using some different versions of quantile regression models, our evidence of the predictive power of the S&P 500 implied volatility for downside risk of the Nikkei is very robust.

An Investigation of the Predictive Speed of the UK VIX for the Downside Risk in European Equity Markets

“…In the fields of business, economics, and finance, downside risk in financial markets is a highly crucial research topic and in fact, recently, many interesting studies regarding this issue have been conducted (e.g., Galsband, 2012;Reboredo and Rivera-Castro, 2014;Min and Kim, 2016;Tsuji, 2017a;Farago and Té dongap, 2018;Bernstein et al, 2018). In a globalizing and tightening international financial markets, how does downside risk in international equity markets spill over?…”