Evaluating Stock Index Return Value-at-Risk Estimates in South Africa

David McMillan and Pako Thupayagale
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David McMillan: David McMillan, School of Management, University of St Andrews, The Gateway, North Haugh, St Andrews, KY16 9SS, United Kingdom. E-mail: dgm6@st-andrews.ac.uk
Pako Thupayagale: Pako Thupayagale, School of Management, University of St Andrews, United Kingdom.

Journal of Emerging Market Finance, 2010, vol. 9, issue 3, 325-345

Abstract: This article evaluates the performance of a range of alternative volatility models in forecasting volatility and value-at-risk (VaR) in the context of the Basle regulatory framework, using stock index return data from South Africa. We extend the current research in emerging markets by considering a wider selection of GARCH-based models, including a variety of asymmetric and long memory models. Our results suggest that models incorporating both asymmetric and long memory attributes generally outperform all other methods in estimating VaR across the three percentiles we considered. These findings are similar to the volatility forecasting exercise we also conduct. More generally, we find that the standard RiskMetrics model is consistently outperformed by all the GARCH-type models we have analysed in the context of VaR modelling. Finally, our results emphasise the importance of using the stringent probability criteria prescribed by the Basle regulatory framework, and of employing out-of-sample forecast evaluation techniques for the selection of forecasting models that provide accurate VaR estimates.

Keywords: JEL Classification: C22; JEL Classification: G13; Volatility forecast; market risk; GARCH model (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:9:y:2010:i:3:p:325-345

DOI: 10.1177/097265271000900304

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