Cross-market volatility index with Factor-DCC

•Novel methodology to create volatility index•Update on the concept of 'volatility surprise'•Methodology reproducible by asset managers•Cross Market Volatility Index computed from Factor DCC model

This paper proposes a new empirical methodology for computing a cross-market volatility index - coined CMIX - based on the Factor DCC-model, implemented on volatility surprises. 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 to hedge multi-asset portfolios with derivative contracts written on the CMIX.