Financial Econometrics and Empirical Market Microstructure

Global Risk Factor Index

There are many indices of solar and geomagnetic activity, e. g., Wolf numbers, indices aa, am, Kp, Dst, AE etc. The objective was to choose the best indicator for adequate description of the global risk factor or to develop a new one. In the author’s opinion, the best global risk factor index should meet the following requirements: [42]

The indices of solar activity are not suitable for describing the global risk factor. This is the very reason for the skepticism of modern science toward the ideas of prominent scholars of the past, particularly Jevons (1878) and Chizhevsky (1936). The failure to find correlations with solar activity (the Wolf number, also known as the sunspot number) has led to the substitution of this idea in modern science with the general idea of accounting for random factors in economics. Economists


Fig. 2 Global risk factor vs. operational risk: screenshot, www. rogovindex. com

rebranded the term “sunspots” by completely stripping it of the implication of Sun - Earth relationships and using it to denote an external non-fundamental variable that influences human behavior (Cass and Shell 1983) (Fig. 2).

The RogovIndex© family of indices was developed for adequate description of the global risk factor; these indices satisfy the above requirements and are based on the widely accepted index of geomagnetic field variation, averaged over several sta­tions (storm-time variation Dst). The conclusion that the effect of heliogeophysical factors on risk is best described by storm-time variation than by any other of the great variety of indices is consistent with the findings of heliobiological research. Indices from the RogovIndex© family can take into account the Mansurov effect by using properly chosen weights:


Yj Vi Dsti

RogovIndex l’ [t] = —i-1 -------- (1)


RogovIndex©[t] is a t-period-average value of a global risk factor index;

T is the duration of time period t, hours;

Dsti is the value of storm-time variation index at an i-th hour, nT;

Vi is a dimensionless weight accounting for the polarity of the interplanetary magnetic field (IMF) in the day to which the i-th hour (Greenwich Mean Time, GMT) belongs:

For RogovIndex©Base all vi = 1

For RogovIndex© B (or RogovIndex©R or RogovIndex©Y) if the day to which the i-th hour belongs is B (or R or Y) in terms of IMF polarity, then vi = 1; else

Vi = 0

The IMF polarity for each given hour is assessed based on the published IMF polarity data for the respective day.

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