PORTFOLIO VOLATILITY SPILLOVER

Gueorgui S. Konstantinov () and Frank J. Fabozzi
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Gueorgui S. Konstantinov: LBBW Asset and Wealth Management, Germany
Frank J. Fabozzi: EDHEC Business School, France

International Journal of Theoretical and Applied Finance (IJTAF), 2022, vol. 25, issue 04n05, 1-39

Abstract: In this paper, the authors estimate portfolio volatilities and use variance−decomposition techniques and Cholesky factorization to construct a portfolio volatility spillover index. Furthermore, the authors show that spillover risks are persistent and much more common than well-known indicators like the turbulence index and the CBOE VIX index might suggest. Moreover, portfolio volatilities show contributions to and from other portfolio volatilities, which indicate elevated financial market interconnectedness and heightened risk. Foreign exchange contributes strong volatility shocks to other portfolios. More importantly, its contribution has a different magnitude and direction after the Global Financial Crisis (GFC) than before depending on the base currency. To show the causality effects of portfolio volatility spillover the authors apply both econometric models and graph theory, demonstrating that the importance is time varying. This requires monitoring and analysis in decision making regarding portfolio management, portfolio construction, and risk management.

Keywords: Portfolio volatility; spillover; multi asset; factors; equity; bonds; currencies; risk management; graph theory (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S0219024922500194

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