The Asian financial crisis: the start of a regime switch in volatility

Using a Markov switching model applied to the VIX and VDAX implied volatility indexes, we find that the volatility of the U.S. S&P100 index and German DAX index switched from a low-value state to a high-value state around the events of the Asian financial crisis. Moreover, the U.S. and German markets have stayed in the high-volatility state for the next five years. We also show that there has been a structural change in the stock index volatility vs returns relationship