Market risk of developed and developing countries during the global financial crisis

Köksal, Bülent and Orhan, Mehmet (2012): Market risk of developed and developing countries during the global financial crisis.

Abstract

This study compares the performance of the widely used risk measure Value-at-Risk (VaR) across a large sample of developed and developing countries. The performance of the VaR is assessed by both unconditional and conditional tests of Kupiec and Christoffersen, respectively, as well as the Quadratic Loss Function. Results indicate that the performance of VaR as a measure of risk is much worse for developed countries than the developing ones during our sample period. One possible reason might be the deeper initial impact of global financial crisis on developed countries than emerging markets. Results also provide evidence of decoupling between emerging and developed countries in terms of market risk during the global financial crisis.

• Item Type: MPRA Paper
• Language: English
• Keywords: Value-at-Risk (VaR), Developed Countries, Emerging Markets, ARCH/GARCH Estimation, Kupiec Test, Christoffersen Test, Quadratic Loss Function
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G0 - General > G01 - Financial Crises

References

Akın, Ç., and M.A. Kose. 2008. "Changing nature of North–South linkages: Stylized facts and explanations." Journal of Asian Economics 19, no. 1: 1-28.

Ane, T. (2006) " An analysis of the Flexibility of Asymmetric Power GARCH models" Computational Statistics and Data Analysis 51: 931-55.

Angelidis, T, Benos, A. , Degiannakis, S. (2004) "The Use of GARCH Models in VaR Estimation" Statistical Methodology 1: 105-128.

Basel Committee on Banking Supervision, 1994. Risk Management Guidelines for Derivates. Bank for International Settlements, Basel.

Basel Committee on Banking Supervision, 1996. Supplement to the Capital Accord to Incorporate Market Risks. Bank for International Settlements, Basel.

Berkowitz, J., and J. O'Brien. (2002). “How Accurate Are Value-at-Risk Models at Commercial Banks?” Journal of Finance 57, 1093-1111.

Bollerslev, T. (1986) "Generalized Autoregressive Conditional Heteroskedasticity." Journal of Econometrics 31: 307-27

Bollerslev, T. (2008) Glossary to Arch (Garch). CREATES Research Paper 2008-49.

Cannata, Francesco and Quagliariello, Mario, The Role of Basel II in the Subprime Financial Crisis: Guilty or Not Guilty? (January 14, 2009). CAREFIN Research Paper No. 3/09. Available at SSRN: http://ssrn.com/abstract=1330417

Chan, N.H., Deng, S-J., Peng, L. and Xia, Z., 2007. “Interval estimation of value-at-risk based on GARCH models with heavy-tailed innovations.” Journal of Econometrics 137, 556–576.

Christoffersen, P., Hahn, J., Inoue, A., 2001. “Testing and comparing Value-at-Risk measures.” Journal of Empirical Finance 8, 325–342.

Clark, E., Kassimitis, K., 2004. “Country financial risk and stock market performance: the case of Latin America.” Journal of Economics and Business 56 (2004) 21–41.

Dooley, M., and M. Hutchison. 2009. "Transmission of the U.S. subprime crisis to emerging markets: Evidence on the decoupling–recoupling hypothesis." Journal of International Money and Finance 28, no. 8: 1331-1349.

Escanciano, J.C., and Olmo, J. (2011) " Robust Backtesting Tests for Value-at-risk Models." Journal of Financial Econometrics, 9, No. 1, 132–161.

European Commission, (2009). Economic crisis in Europe: causes, consequences and responses, Office for Official Publications of the European Communities.

Engle, R. F. (1982) "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation." Econometrica 50: 987-1007

Fan, Y., Zhang, Y-J. , Trai, H-T., and Wei, Y-M. (2008) " Estimating ‘Value at Risk’ of Crude Oil Price and its Spillover Effect Using the GED-GARCH approach." Energy Economics 30: 3156-3171.

Felices, G., and T. Wieladek. 2012. "Are Emerging Market Indicators of Vulnerability to Financial Crises Decoupling from Global Factors?" Journal of Banking and Finance 36, no. 2: 321-331. Fidrmuc, J., and I. Korhonen. 2010. "The Impact of the Global Financial Crisis on Business Cycles in Asian Emerging Economies." Journal of Asian Economics 21, no. 3: 293-303.

Frank, N., and H. Hesse. 2009. "Financial Spillovers to Emerging Markets during the Global Financial Crisis." Finance a Uver/Czech Journal of Economics and Finance 59, no. 6: 507-521.

Giot, P. and Laurent, S. (2003) “Market risk in commodity markets: a VaR approach.” Energy Economics, 25, 435–457.

Giot, P. and Laurent, S. (2004) “Modelling Daily Value-at-Risk Using Realized Volatility and ARCH Type Models.” Journal of Empirical Finance, 11: 379-398.

Goodhart, C. A. E. (2008). "The Regulatory Response to the Financial Crisis." Journal of Financial Stability 4(4): 351-358.

Gnamassou, Y.T. (2010) “Value-at-risk prediction: a comparison of alternative techniques applied to a large sample of individual stock data.”, MS thesis, HEC Montreal.

Hartz, C. Mittnik, S. & Paolella, M. (2006) " Accurate Value-at-Risk Forecasting Based on the Normal-GARCH Model." Computational Statistics and Data Analysis 51: 2295-2312.

Kim, S.; J.-W. Lee; and C.-Y. Park. 2011. "Emerging Asia: Decoupling or Recoupling." World Economy 34, no. 1: 23-53.

Kose, M.A.; C. Otrok; and E.S. Prasad. 2008. "Global Business Cycles: Convergence or Decoupling?" National Bureau of Economic Research Working Paper Series No. 14292

Kupiec, P.H., 1995. “Techniques for verifying the accuracy of risk measurement models.” Journal of Derivatives 3, 73–84.

McAleer, M., Veiga, B., and Hoti, S. (2011) “Value-at-Risk for country risk ratings”, Mathematics and Computers in Simulation, 81, 1454–1463

Poon, S.-H. & Granger, C. W. J. (2003) "Forecasting Volatility in Financial Markets: A Review." Journal of Economic Literature 41: 478-539.

Orhan, M. and Köksal, B., 2012 “A Comparison of GARCH Models for VaR Estimation”, Expert Systems with Applications, 39, 3582-2592, 2012.

Saadi Sedik, T., and O. Williams. 2011. Global and Regional Spillovers to GCC Equity Markets. (International Monetary Fund, IMF Working Papers: 11/138).

So, M.K.P. and Yu, P.L.H., 2006 “Empirical analysis of GARCH models in value at risk estimation”, Int. Fin. Markets, Inst. and Money 16 180–197.

Tang, T-L, Shieh, S-J. (2006) “Long Memory in Stock Index Futures Markets: A Value-At-Risk Approach”, Physica A, 306, 437-448.

Tett, G. “Genesis of the debt disaster”, Financial Times, May 1, 2009. Uckun, D., and M. Doerr. 2010. "Emerging Markets: Theory and Practice/Turkey's Reforms Post 2001 Crisis." Journal of Global Analysis 1, no. 1: 51-73.

Wu P. T., Shieh S.J. (2007) “Value-At-Risk Analysis for Long-Term Interest Rate Futures: Fat-Tail and Long Memory in Return Innovations”, Journal Of Empirical Finance, 14, 248-259.