Asymmetric implied market volatility and terrorist attacks

This paper studies the impact of terrorism on implied volatility in the U.S. financial market via an event study methodology. We decompose the options-based and forward looking VIX index into its negative (VIX−) and positive (VIX+) components, extracted only from put options and call options, respectively. This decomposition of the VIX index allows us to better investigate the asymmetric impact of terrorist attacks on implied volatility from the puts and calls channels separately. Our study finds evidence of a greater impact of terror detected for the puts channel of VIX, namely VIX−. We further show that events that occur within the U.S. appear to impact both VIX and VIX− in a similar way, whereas international terrorist attacks show a greater impact on the puts component, VIX−. The calls component, VIX+, is found to be mainly detached from terrorist attacks.