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

By Armando Méndez Morales, Liliana B Schumacher

March 1, 2003

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Format: Chicago

Armando Méndez Morales, and Liliana B Schumacher. Market Volatility As a Financial Soundness Indicator: An Application to Israel, (USA: International Monetary Fund, 2003) accessed October 8, 2024

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.

Subject: Asset prices, Exchange rates, Financial institutions, Financial markets, Financial regulation and supervision, Foreign exchange, Market risk, Prices, Stock markets, Treasury bills and bonds

Keywords: Asset prices, Auctions interest rate, Central bank, Central bank auctions interest rate, Country portfolio volatility indicator, Exchange rate, Exchange rate volatility, Exchange rates, Exposure indicator, GARCH term, Global, Indicator, Interest rate, Market risk, Middle East, Multivariate GARCH model, Portfolio, Portfolio return, Risk, Risk environment, Stock markets, Treasury bill equation, Treasury bills and bonds, Variance covariance matrix, Volatility, Volatility indicator, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/047
Stock No:

WPIEA0472003
ISBN:

9781451846669
ISSN:

1018-5941

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