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Cross-market volatility index with Factor-DCC

Aboura, Sofiane; Chevallier, Julien (2015), Cross-market volatility index with Factor-DCC, International Review of Financial Analysis, 42, p. 132–140. 10.1016/j.irfa.2014.06.003

Type
Article accepté pour publication ou publié
Date
2015-12
Journal name
International Review of Financial Analysis
Volume
42
Publisher
Elsevier
Pages
132–140
Publication identifier
Metadata
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Author(s)
Aboura, Sofiane
Dauphine Recherches en Management [DRM]
Chevallier, Julien
Abstract (EN)
This paper proposes a new empirical methodology for computing a cross-market volatility index – coined CMIX – based on the Factor DCC-model, implemented on volatility surprises. This approach solves both problems of treating high-dimensional data and estimating time-varying conditional correlations. We provide an application to a multi-asset market data composed of equities, bonds, foreign exchange rates and commodities during 1983–2013. This new methodology may be attractive to asset managers, since it provides a simple way to hedge multi-asset portfolios with derivative contracts written on the CMIX.
Subjects / Keywords
Cross-market index; Factor-DCC; Volatility surprise; Asset management
JEL
C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
G01 - Financial Crises
F15 - Economic Integration