Volatility Risk Pass-Through

51 Pages Posted: 19 Nov 2018

See all articles by Ric Colacito

Ric Colacito

University of North Carolina Kenan-Flagler Business School; NBER

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Yang Liu

The University of Hong Kong - Faculty of Business and Economics

Ivan Shaliastovich

University of Wisconsin - Madison

Multiple version iconThere are 3 versions of this paper

Date Written: November 2018

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.

Suggested Citation

Colacito, Riccardo and Croce, Mariano Massimiliano and Liu, Yang and Shaliastovich, Ivan, Volatility Risk Pass-Through (November 2018). NBER Working Paper No. w25276, Available at SSRN: https://ssrn.com/abstract=3286941

Riccardo Colacito (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://drric.web.unc.edu/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mariano Massimiliano Croce

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Yang Liu

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Ivan Shaliastovich

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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