What are the events that shake our world? Measuring and hedging global COVOL

Robert Engle and Susana Campos-Martins

Journal of Financial Economics, 2023, vol. 147, issue 1, 221-242

Abstract: Some events impact volatilities of most assets, asset classes, sectors and countries, causing serious damage to investment portfolios. The magnitude of such shocks is defined as global COVOL which is an abbreviation for global common volatility, a broad measure of all types of global financial risk. This paper introduces a statistical formulation of such events as common volatility innovations in both a multivariate volatility and an asset pricing context. Simulations verify the statistical performance of a simple but novel estimator and of a test to detect global COVOL. Two empirical examples show the events that have had the biggest impact on financial markets. The results are useful for portfolio optimization and risk forecasting.

Keywords: Global events; Volatility comovements; Multiplicative factor models; Geopolitical risk; Portfolio optimization (search for similar items in EconPapers)
JEL-codes: C38 C51 C58 G11 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:147:y:2023:i:1:p:221-242

DOI: 10.1016/j.jfineco.2022.09.009

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