The Russell–Parametric Cross-Sectional Volatility Indexes (CrossVol) relies on Russell’s global index construction rules and a new calculation methodology developed by Parametric, according to a press release.
The new CrossVol Indexes are subdivided in the same fashion as the underlying Russell Indexes, covering each of the major regions such as Global, U.S., Developed ex-U.S., and Emerging Markets. Within each region, cross-sectional volatility is calculated for separate market capitalization tiers and investment styles, including all cap, large cap, small cap, value, and growth, as well as economic sectors.
Paul Bouchey, Director of Research at Parametric, said in the announcement: “We monitor cross-sectional volatility in our investment process to adjust the size of our active bets. It’s a core part of our process. Having it available in the form of indexes makes our analysis much easier to perform.”
Bouchey explained that as cross-sectional volatility increases, the payoff for an active bet increases. A good bet, for example, will pay off more with high CrossVol and less with low CrossVol. Similarly, the loss resulting from a bad bet will be more in periods of high CrossVol, but lower in periods of low CrossVol.More information is at http://www.crossvol.com and http://beta.parametricportfolio.com/wp-content/uploads/2010/10/MeasuringAlphaPotential.pdf.