International Transmission of Option Volatility and Skewness : When you ’ re smiling , does the whole world smile ?

Several papers have shown that volatility spills over from one stockmarket to another. By concentrating on index options, which depend on forward-looking distributions, this paper is able to take an ex ante approach to spillovers. It asks whether changes in the implied volatility and implied skewness of one market are quickly reflected in other markets, using daily data from the US, Japan and UK. Not surprisingly, implied volatilities are correlated across time zones and changes in implied volatility are transmitted from one market to the next. By contrast, we find little tendency for changes in implied skewness in one market to spread to other nations’ markets, which suggests that local factors must be the cause of daily shifts in skewness. However, tests reject the hypotheses of skewness being related either to current or to future returns in the home market. The US implied distribution has been consistently more negatively skewed than those in Japan and the UK, so factors are at work in the US option market which do not apply elsewhere, the most likely being portfolio-insuring behaviour by fund managers.