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Value-at-Risk in Frontier Markets: Adapted Models and Evidences from Two North-African Stock Exchanges

Author

Listed:
  • Mhamed-Ali El-Aroui
  • Wafa Snoussi

    (International University of Rabat, Rabat Business School)

Abstract

When estimating market-risk in frontier or emerging markets, standard Value-at-Risk (VaR) models have been proven to be poorly adapted. Specific microstructure criteria of non-developed markets such as pronounced asymmetric information, low liquidity and over-predictability should be modelled. To tackle such a problem, market-risk is estimated here using four extensions of the basic AR(1)-GARCH(1,1)-GPD model: MFpred, MFliq, MFasy and MFcomb treating over-predictability, low liquidity and asymmetric volatility. Using backtesting, empirical results on Tunisian and Moroccan daily equity returns show that these adapted methods give significantly more accurate VaR estimators. This improvement is very pronounced during economic crises.

Suggested Citation

  • Mhamed-Ali El-Aroui & Wafa Snoussi, 2020. "Value-at-Risk in Frontier Markets: Adapted Models and Evidences from Two North-African Stock Exchanges," The African Finance Journal, Africagrowth Institute, vol. 22(1), pages 1-20.
    • Handle: RePEc:afj:journl:v:22:y:2020:i:1:p:1-20
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    File URL: https://journals.co.za/content/finj/22/1/ejc-finj-v22-n1-a1
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    More about this item

    Keywords

    Value-at-Risk; Frontier Markets; Asymmetric information; Over-predictability; Market-risk; Liquidity; Backtesting; Morocco; Tunisia;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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