Market Volatility As a Financial Soundness Indicator: An Application to Israel

Armando Méndez Morales and Liliana Schumacher

No 2003/047, IMF Working Papers from International Monetary Fund

Abstract: Financial decisions of economic agents are based on volatility considerations. However, no aggregate indicators have been used by policymakers and regulators to assess the market risk environment. This paper applies a market volatility indicator to analyze the Israeli's transition toward inflation targeting. Unlike conventional measures of volatility, it shows a substantial decline once volatility is measured against the minimum variance for the same returns on assets. Using a conventional Multivariate GARCH model, we find that interest rates sensitivity to changes in the risk environment may be important for a correct identification of volatility patterns of individual assets.

Keywords: WP; interest rate; exchange rate; central bank; Volatility; Risk; Indicator; Portfolio; volatility indicator; Multivariate GARCH model; risk environment; GARCH term; auctions interest rate; exchange rate volatility; portfolio return; central bank auctions interest rate; treasury bill equation; country portfolio volatility indicator; variance covariance matrix; exposure indicator; Exchange rates; Asset prices; Stock markets; Treasury bills and bonds; Market risk; Middle East; Global (search for similar items in EconPapers)
Pages: 39
Date: 2003-03-01
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Citations: View citations in EconPapers (1)

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