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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

Type
Article accepté pour publication ou publié
Date
2015-09
Journal name
Journal of International Financial Markets, Institutions and Money
Volume
38
Publisher
Elsevier
Pages
25–41
Publication identifier
10.1016/j.intfin.2015.05.008
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-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 / Keywords
Cross-Volatility Index; Country Risk; Factor-DCC; PCA; LASSO
JEL
C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
G01 - Financial Crises
F15 - Economic Integration

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