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How Accurate Are Risk Models During COVID-19 Pandemic Period?

Foued Hamouda (), Rabeb Riahi and Jamel Henchiri
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Foued Hamouda: GEF2A-Lab
Rabeb Riahi: University of Gabès

Chapter Chapter 12 in Crises and Uncertainty in the Economy, 2022, pp 203-215 from Springer

Abstract: Abstract During times of a financial crisis, knowledge of modern risk management approaches is required. In this sense, only financial risk managers with the required expertise to measure and understand risk could avoid crisis. Value at Risk (VaR) has been considered for a long time as a significant risk management tool. This measure has become one of the most popular indicators of financial market risk since JP Morgan published its RiskMetrics system in 1994. In this chapter, we study the relative performance of Value-at-Risk models prior and after the recent financial crisis referring to the COVID-19 pandemic period. Using the NGARCH model, which considers the leverage effect, we model the conditional volatility of each series. We compared the accuracy of five VaR estimates using backtest methods. The result suggests that the conditional EVT remarkably achieve reliable VaR forecasts and then is more relevant and the best performing model. In terms of VaR forecasting, given that this model obviously beats other competitive models, we encourage the use of this model when controlling market risk.

Date: 2022
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DOI: 10.1007/978-981-19-3296-0_12

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