Cross-market index with Factor-DCC

•New methodology to create cross-market index•Factor modeling, coupled with DCC model•Original results applied to cross-market dataset•Interest for practitioners to replicate methodology tailored to their needs

This paper proposes a new empirical methodology for computing a cross-market index - coined CMI - based on the Factor DCC-model. This approach solves both problems of treating high-dimensional data and estimating time-varying conditional correlations. We provide an application to a multi-asset market data composed of equities, bonds, foreign exchange rates and commodities during 1983-2013. This new methodology may be attractive to asset managers, since it provides a simple way of constructing passive portfolios customized on any asset class.