Series: Analytical Articles.
Author: Maria T. Gonzalez-Perez .
Topics: Spain, Economic situation, Financial analysis.
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Summary
This article is a summary of the methodology proposed by Gonzalez-Perez (2021) for estimation of a volatility index for an asset portfolio on which no options have been issued. The methodology allows volatility indices to be constructed for personalised portfolios, using the options issued on the individual shares and a benchmark portfolio that provides information on the correlation risk premium between the assets in the portfolio concerned. This methodology and a benchmark portfolio representing the Spanish stock market (IBEX 35) are used to estimate a volatility index for the Spanish banking sector. The methodology proposed allows for adjustment of the benchmark portfolio according to the framework of uncertainty desired.
A comparison between this sectoral volatility index and that of the Spanish stock market overall and other key indices shows that falls in bank share prices have a particularly strong correlation with growth in banking sector uncertainty, while share price rallies have a correlation with lower uncertainty either on the Spanish equity market or in the banking sector. Moreover, there is a persistent and positive volatility spread between the Spanish stock market and the banking sector. The fact that the Spanish banking sector has become more integrated following the global financial crisis, together with the gradual increase in correlation between bank portfolios, helps to explain this. In February 2022 this spread stood at around 20%. The Spanish banking sector volatility index moves parallel to its European equivalent, with an average historical spread of around 6%. Lastly, a significantly stronger correlation is found between the uncertainty priced into the banking sector and economic policy uncertainty than between the latter and the uncertainty priced into the market. These findings confirm that a measure of banking sector volatility provides important information, in addition to that provided by a measure of market volatility, which is extremely useful for monitoring and forecasting risk and returns in the Spanish banking sector.