Volatility Risk Pass-through

Riccardo Colacito, Mariano Max Croce, Yang Liu, Ivan Shaliastovich

NBER Working Paper No. 25276
Issued in November 2018
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, International Finance and Macroeconomics

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.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25276