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A cross-volatility index for hedging the country risk

Sofiane Aboura and Julien Chevallier
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Sofiane Aboura: DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique

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Abstract: 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.

Keywords: Cross-Volatility Index; Country Risk; Factor-DCC; PCA; LASSO (search for similar items in EconPapers)
Date: 2015
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01529742
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Published in Journal of International Financial Markets, Institutions and Money, Elsevier, 2015, 38, pp.25-41. ⟨10.1016/j.intfin.2015.05.008⟩

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