Value-at-Risk analysis in the MENA equity markets: Fat tails and conditional asymmetries in return distributions

In this paper, we examine the forecasting performance of the Valueat-Risk (VaR) models in the MENA equity markets. We use the Asymmetric Power ARCH model to analyze four MENA emerging markets, namely Egypt, Jordan, Morocco, and Turkey. While most empirical studies focus only on holding a long position of a portfolio, in this paper, we consider a short position in each market. In the process, we find that the returns have significantly fatter tails than the normal distribution and therefore introduce the Asymmetric Power ARCH model to estimate the Value-at-Risk in each market. Then, we explore the impact of asymmetry in the conditional variance and fat-tailed distributions on measuring Value-at-Risk. We find that the VaR estimates based on the Student APARCH model are more accurate than those generated using Normal APARCH models, and therefore a proper risk assessment should not neglect both the long memory and tail behavior in these markets. Our results should be useful to investors, bankers, and fund managers, whose success depends on the ability to forecast stock price movements in these markets. © 2014 Elsevier B.V. All rights reserved. ∗ Tel.: +961 6930250. E-mail address: [email protected] http://dx.doi.org/10.1016/j.mulfin.2014.11.002 1042-444X/© 2014 Elsevier B.V. All rights reserved. A. Assaf / J. of Multi. Fin. Manag. 29 (2015) 30–45 31