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

Nico Katzke () and Chris Garbers ()
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Chris Garbers: Department of Economics, University of Stellenbosch

No 06/2015, Working Papers from Stellenbosch University, Department of Economics

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.

Keywords: Value-at-Risk; Expected Shortfall; GARCH; Fractional Integration; Kupiec back-testing procedure (search for similar items in EconPapers)
JEL-codes: C22 G13 G17 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-for and nep-rmg
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