A Reflexivity-Volatility Based Risk Assessment Tool

Luca Bagato (), Alessio Gioia () and Enrico Mandelli ()
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Luca Bagato: Borsa Italiana, Euronext Group
Alessio Gioia: BPER Group Modena
Enrico Mandelli: Borsa Italiana, Euronext Group Milano

Rivista Internazionale di Scienze Sociali, 2022, vol. 130, issue 1, 29-44

Abstract: This study introduces a new automated approach we have called the "volaxivity algorithm" to detect risk-on and risk-off signals across several asset classes, starting from observing the relevant volatility indices. The algorithm is based on the definition and construction of a new set of risk sentiment indices discussed in this paper, including the "volaxivity index". The theoretical background our model is based on is defined by reflexivity theory and an event-driven definition of time. In order to assess the validity of our methodology from a risk management point of view, we compare the signals originated by the algorithm with their realizations over 19 quarters between January 2016 and September 2020. The empirical results discussed in the backtesting section of the paper confirm the validity of our approach, even during stressed market periods. We also find that the predictive capability of our model is higher for risk-off signals.

Keywords: Reflexivity; Volatility Indices; Risk Management; Central Banks (search for similar items in EconPapers)
JEL-codes: E58 G12 G17 G32 G40 (search for similar items in EconPapers)
Date: 2022
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