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How can I calculate market risk for the US Stock Market (NYSE or NASDAQ) using only freely accessible data? I'm only interested in the market risk of the whole economy not of different industries, companies or sub-sectors.

Somebody suggested to me to download market index data and construct the volatility as a measure of market risk. But I can't find a proper explanation how I do this.

Thank you.

p.s. Is the following procedure correct?:

I get data US Stock market (for example https://fred.stlouisfed.org/series/SP500) calculate the growth rate and in the last step I compute the variance of the growth rate to get the market risk?

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migrated from stats.stackexchange.com Mar 26 '18 at 16:02

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  • $\begingroup$ There is not one canonical definition of market risk and many to chose from. You seem to have no argument to prefer one in particular. In this situation, I would just choose the definition of market risk that is easiest to compute with the data you have. Let's consider the risk that the market does not open tomorrow. That's certainly a risk. This can be computed using exchange calenders (available online for free) past data (of the sort you found) and a simple probability model $\endgroup$ – user189035 Mar 26 '18 at 12:54
  • $\begingroup$ Thank you for your comment. But I was thinking more about the method used by Campbell et al. 2001 (onlinelibrary.wiley.com/doi/full/10.1111/0022-1082.00318) $\endgroup$ – PAS Mar 26 '18 at 14:17
  • $\begingroup$ Even then they detail more than one measure of market risk. You'd have to be more specific. $\endgroup$ – user189035 Mar 26 '18 at 15:00
  • $\begingroup$ They define market risk as the the variance of the average return of the stock at date $t$ and the average return over the whole sample from 1962-1997. Its formula 17 the values are depicted at page 11. $\endgroup$ – PAS Mar 26 '18 at 17:43
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This paper on Fluctuations in Uncertainty may be helpful and relevant.

The volatility of the stock market or GDP is often used as a measure of uncertainty because when a data series becomes more volatile it is harder to forecast.

Computing the variance or standard deviation of the growth rate of a variable is quite a common procedure to get volatility figures.

enter image description here

The above figure shows the VIX index of 30-day implied volatility on the Standard & Poor's 500 stock market index. The VIX index is traded on the Chicago Board Options Exchange. It is constructed based on the values of a range of call and put options on the Standard & Poor's 500 index and represents the market's expectation of volatility over the next 30 day.

Other common measures of uncertainty include forecaster disagreement, mentions of "uncertainty" in news, and the dispersion of productivity shocks to firms. Check Bloom's web page and his Economic Policy Uncertainty Index

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  • $\begingroup$ Thank you for your answer. But my question is a little bit more technical. How can I calculate the market risk or systematic risk (in percent) based on such an index? $\endgroup$ – PAS Mar 29 '18 at 8:26
  • $\begingroup$ I don't know exactly how the VIX index is constructed but the way you wanted to construct market risk based on standard deviation of growth rates is ok. $\endgroup$ – emeryville Mar 29 '18 at 8:31

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