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A Reflexivity-Volatility Based Risk Assessment Tool

Author

Listed:
  • Luca Bagato

    (Borsa Italiana, Euronext Group)

  • Alessio Gioia

    (BPER Group Modena)

  • Enrico Mandelli

    (Borsa Italiana, Euronext Group Milano)

Abstract

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.

Suggested Citation

  • Luca Bagato & Alessio Gioia & Enrico Mandelli, 2022. "A Reflexivity-Volatility Based Risk Assessment Tool," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 130(1), pages 29-44.
    • Handle: RePEc:vep:journl:y:2022:v:130:i:1:p:29-44
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    More about this item

    Keywords

    Reflexivity; Volatility Indices; Risk Management; Central Banks;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G40 - Financial Economics - - Behavioral Finance - - - General

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