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

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  • Mr. Armando Méndez Morales
  • Miss Liliana B Schumacher

Abstract

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.

Suggested Citation

  • Mr. Armando Méndez Morales & Miss Liliana B Schumacher, 2003. "Market Volatility As a Financial Soundness Indicator: An Application to Israel," IMF Working Papers 2003/047, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/047
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    References listed on IDEAS

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    Cited by:

    1. Mr. Rupert D Worrell, 2004. "Quantitative Assessment of the Financial Sector: An Integrated Approach," IMF Working Papers 2004/153, International Monetary Fund.

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