Do Long Memory and Asymmetries Matter When Assessing Downside Return Risk?
Stellenbosch Working Paper Series No. WP06/2015Publication date: 2015
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
In this paper we set out to test whether, on sector level, returns series in South Africa exhibit long memory and asymmetries and, more specifically, whether these effects should be accounted for when assessing downside risk. The purpose of this analysis is not to identify the most optimal downside risk assessment model or to reaffirm the often regarded stylized fact of long memory and asymmetry in asset returns series. Rather we set out to establish whether accounting for these effects and allowing for more flexibility in second order persistence models lead to improved risk assessments. We use several variants of the widely used GARCH family of second order persistence models that control for these effects, and compare the downside risk estimates using Value-at-Risk measures of these different models and compare their out-of-sample performances. Our findings confirm that controlling for asymmetries and long memory in volatility models improve risk management calculations.
JEL Classification:C22, G13, G17
Keywords:Value-at-Risk, Expected Shortfall, GARCH, Fractional Integration, Kupiec back-testing procedure
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27 Jun 2025 Another setback for the GNU, but oil markets breathe a little easierThis week was marked by heightened tensions both domestically and internationally. At home, friction intensified between the two largest parties in the Government of National Unity (GNU), the ANC and the DA, following the firing of one of the DA's deputy ministers. Internationally, the US conducted airstrikes on three Iranian nuclear facilities using...
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