Abstract
We construct a new index of global equity market risk (EMR) using market interconnectedness and volatilities. We study the relationship between our EMR and the VIX over the last two decades. The EMR is shown to be a novel approach to measuring global market risk, and an alternative to the VIX. Using data of 20 major stock markets, including G10 economies, we find spikes in our EMR index during the dotcom bubble, the global financial crisis, the European sovereign debt crisis, and the novel coronavirus pandemic. The result shows that the global financial crisis and the Covid-19 induced crisis record the historic highest spikes in financial market risk, suggesting stronger evidence of contagion in both periods.
Highlights
Concerns about monitoring financial market turbulence and risk have intensified in recent times, especially in the heat of the ongoing global pandemic
We study the relationship between our equity market risk (EMR) index and the VIX by using daily prices of 20 major stock market from Bloomberg, covering January 2000 to June 2020
We study the relationship between our EMR index and the VIX by using data from the Bloomberg database
Summary
Concerns about monitoring financial market turbulence and risk have intensified in recent times, especially in the heat of the ongoing global pandemic. This paper propose the construction of a new index of equity market risk (EMR) using market interconnectedness and volatilities. The latter is considered a measure of market uncertainty or fear, which can be proxied via standard deviation of returns. Our approach to the construction of the EMR follows the Mahalanobis turbulence measure of [1], and it is distinct from the systemic risk measures in [2,3,4,5,6,7,8]. The closest benchmark to our measure is the VIX - the Chicago Board of Exchange volatility index, generally used for measuring the level of global market risk
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