A cross-volatility index for hedging the country risk
Aboura, Sofiane; Chevallier, Julien (2015), A cross-volatility index for hedging the country risk, Journal of International Financial Markets, Institutions and Money, 38, p. 25–41. 10.1016/j.intfin.2015.05.008
TypeArticle accepté pour publication ou publié
Journal nameJournal of International Financial Markets, Institutions and Money
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Abstract (EN)This paper proposes a new empirical methodology for computing a cross-volatility index, coined CVIX, that characterizes the country risk understood here as the financial market risk measurement. The approach, based on the Factor DCC-model, requires to encapsulate all the sources of risk stemming from the financial markets for any given country. We provide an application to the U.S. economy by constructing an aggregate volatility index composed of implied volatility indexes characterizing the equity market, the FX market, fixed income market and the commodity market. The analysis reveals that 75% of the aggregate risk comes from the commodity market, and that the volatility index average value evolves around 22%. The CVIX provides a better hedging performance than the VVIX used as a benchmark.
Subjects / KeywordsCross-Volatility Index; Country Risk; Factor-DCC; PCA; LASSO
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