Abstract
Within a Markov regime switching perspective, we examine the spillovers between the returns of the ten most representative US equity sectors and the returns of gold, oil, and S&P 500 (GOI), on the one hand, and their implied volatilities, GVZ, OVX, and VIX, on the other hand. Our objective is to check if the implied volatilities of GOI influence the US equity sectors more than GOI returns. Single regime results show that GOI volatilities affect the equity sector returns more than GOI returns, suggesting that forward-looking volatility expectations play a more significant role in determining sector returns than current and historical GOI returns. During tranquillity periods, all three implied volatilities influence equity sector returns more than GOI returns. Moreover, VIX has the strongest effect on sectoral returns. During turmoil periods, VIX influences the sectoral returns more than S&P 500 returns. However, the returns of gold and oil influence equity sector returns more than their implied volatilities. The result may be useful to portfolio and equity risk managers for improved forecasting and hedging in the US equity markets.