A Reflexivity-Volatility Based Risk Assessment Tool

Name: A Reflexivity-Volatility Based Risk Assessment Tool
Brand: Vita e Pensiero
Price: 6.00 EUR
Availability: OnlineOnly

digital

Article

Magazine

RIVISTA INTERNAZIONALE DI SCIENZE SOCIALI

Issue

RIVISTA INTERNAZIONALE DI SCIENZE SOCIALI - 2022 - 1

Title

A Reflexivity-Volatility Based Risk Assessment Tool

Authors

Luca Bagato, Alessio Gioia, Enrico Mandelli

Publisher

Vita e Pensiero

Format

Article |

Pdf

Pages

Online from

05-2022

Doi

10.26350/000518_000089

Issn

0035-676X (print) | 1827-7918 (digital)

€ 6.00

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Description

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.

Authors biography

Luca Bagato, Borsa Italiana, Euronext Group. Email: luca.bagato@unicatt.it.
Alessio Gioia, BPER Group Modena. Email: alessio.gioia@unicatt.it.
Enrico Mandelli, Borsa Italiana, Euronext Group Milano. Email: enrico.mandelli@unicatt.it.