The Volatility Spillover Effect between Index Options and their Underlying Markets: Evidence from the US, the UK, and Taiwan

This study examines the volatility spillover effect among five index options and their underlying markets. Results show that the bidirectional volatility spillover effect and the cross-market leverage effect exist between index options and their underlying markets. Our findings confirm that the volatility spillover effect is generally outweighed by shocks in the underlying market, and that the options implied price volatility is provoked by the information shock occurring in both the cash and options markets to a higher degree. Through the volatility impulse response function, this study shows that the options implied prices are more sensitive to innovations in both markets.