Detecting Latent Volatility Contagion

Vidal Llauradó, Joan (2026): Detecting Latent Volatility Contagion.

Abstract

This paper develops a feasible estimator for the source-screened latent contagion object isolated in the first two papers and applies it to a balanced Oxford-Man realized-volatility panel of eight global equity indices. Starting from the reduced local Gaussian block experiment, it represents local alternatives by covariance derivatives, removes the target-only tangent space, and estimates the remaining source-screened component with a low-dimensional projected covariance-score GMM statistic. The paper derives the projected-score geometry, proves the associated local Gaussian efficiency, rough-regime projected-rank, pilot-adaptive transfer, and uniform minimax results, and validates the implementation in synthetic experiments using closed-form information and noncentrality constants. In the Oxford-Man application, estimated physical-measure roughness lies between about 0.04 and 0.09 across the panel, with H_P approximately 0.071 for SPX, while the full-sample directed contagion map is dense and economically informative through intensity ranking and rolling stability rather than sparse edge selection. The paper closes the trilogy with a feasible estimator, a validation protocol, and a real-data physical-measure application, while leaving matched option-panel P/Q classification for later work.

• Item Type: MPRA Paper
• Language: English
• Keywords: latent volatility contagion; projected score estimator; covariance score GMM; source-screened inference; rough volatility; realized volatility; Oxford-Man realized library; local Gaussian experiments; nuisance-orthogonal estimation; financial econometrics
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

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