Volatility Risk Pass-Through

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 expo...

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Bibliographic Details
Published inThe Review of financial studies Vol. 35; no. 5; pp. 2345 - 2385
Main Authors Colacito, Riccardo, Croce, Mariano M, Liu, Yang, Shaliastovich, Ivan
Format Journal Article
LanguageEnglish
Published Oxford University Press 01.05.2022
Subjects
F31
G12
C62
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Summary: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 larger and in the order of 90%. A novel channel of risk sharing of volatility risks can explain our empirical findings.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhab096