Selection of Value-at-Risk models for MENA Islamic indices

Wassim Ben Ayed (), Ibrahim Fatnassi and Abderrazak Ben Maatoug

Journal of Islamic Accounting and Business Research, 2020, vol. 11, issue 9, 1689-1708

Abstract: Purpose - The purpose of this study is to investigate the performance of Value-at-Risk (VaR) models for nine Middle East and North Africa Islamic indices using RiskMetrics and VaR parametric models. Design/methodology/approach - The authors test the performance of several VaR models using Kupiec and Engle and Manganelli tests at 95 and 99 per cent levels for long and short trading positions, respectively, for the period from August 10, 2006 to December 14, 2014. Findings - The authors’ findings show that the VaR under Student and skewed Student distribution are preferred at a 99 per cent level VaR. However, at 95 per cent level, the VaR forecasts obtained under normal distribution are more accurate than those generated using models with fat-tailed distributions. These results suggest that VaR is a good tool for measuring market risk. The authors support the use of RiskMetrics during calm periods and the asymmetric models (Generalized Autoregressive Conditional Heteroskedastic and the Asymmetric Power ARCH model) during stressed periods. Practical implications - These results will be useful to investors and risk managers operating in Islamic markets, because their success depends on the ability to forecast stock price movements. Therefore, because a few Islamic financial institutions use internal models for their capital calculations, the regulatory committee should enhance market risk disclosure. Originality/value - This study contributes to the knowledge in this area by improving our understanding of market risk management for Islamic assets during the stress periods. Then, it highlights important implications regarding financial risk management. Finally, this study fills a gap in the literature, as most empirical studies dealing with evaluating VaR prediction models have focused on quantifying the model risk in the conventional market.

Keywords: Value-at-Risk; APARCH; Islamic indices; RiskMetrics (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jiabrp:jiabr-07-2019-0122

DOI: 10.1108/JIABR-07-2019-0122

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