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

Author/Editor: Méndez Morales, Armando ; Schumacher, Liliana
Publication Date: March 01, 2003
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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.
Series: Working Paper No. 03/47
Subject(s): Stock markets | Israel | Financial Soundness indicators | Economic models

Author's Keyword(s): Volatility | Risk | Indicator | Portfolio
Publication Date: March 01, 2003
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA0472003 Pages: 38
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