Do Long Memory and Asymmetries Matter When Assessing Downside Return Risk?

Stellenbosch Working Paper Series No. WP06/2015
 
Publication date: 2015
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

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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13 September 2021
It was a data-heavy week in SA, with the 2021Q2 real GDP data indicating that the economy had better-than-expected recovery momentum in the first half of the year. While growth remained solid in the second quarter, both the survey and actual data released last week revealed the significant impact that the range of shocks at the start of the third quarter...

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