Expected shortfall in the presence of asymmetry and long memory: An application to Vietnamese stock markets
Abstract
Purpose
This study aims to analyse the conditional volatility of the Vietnam Index (Ho Chi Minh City) and the Hanoi Exchange Index (Hanoi) with a specific focus on their application to risk management tools such as Expected Shortfall (ES).
Design/methodology/approach
First, the author tests both indices for long memory in their returns and squared returns. Second, the author applies several generalised autoregressive conditional heteroskedasticity (GARCH) models to account for asymmetry and long memory effects in conditional volatility. Finally, the author back tests the GARCH models’ forecasts for Value-at-Risk (VaR) and ES.
Findings
The author does not find long memory in returns, but does find long memory in the squared returns. The results suggest differences in both indices for the asymmetric impact of negative and positive news on volatility and the persistence of shocks (long memory). Long memory models perform best when estimating risk measures for both series.
Practical implications
Short-time horizons to estimate the variance should be avoided. A combination of long memory GARCH models with skewed Student’s t-distribution is recommended to forecast VaR and ES.
Originality/value
Up to now, no analysis has examined asymmetry and long memory effects jointly. Moreover, studies on Vietnamese stock market volatility do not take ES into consideration. This study attempts to overcome this gap. The author contributes by offering more insight into the Vietnamese stock market properties and shows the necessity of considering ES in risk management. The findings of this study are important to domestic and foreign practitioners, particularly for risk management, as well as banks and researchers investigating international markets.
Keywords
Acknowledgements
The author would like to thank the editor (Nick Nguyen) and an anonymous reviewer. Their suggestions led to substantial improvements of this paper. The author is thankful for the advice, remarks and support from Tony Klein, Philipp Lauenstein, Nhung Le, Hermann Locarek-Junge, Duc Khuong Nguyen, Linh Nguyen, Nga Nguyen, Thao Nguyen, Quoc Phan, Paul Bui Quang and the participants of the 3rd Vietnam International Conference in Finance, Da Nang, Vietnam. This paper was completed while the author was attending the School of Business, International University, National University, Ho Chi Minh City, on a scholarship from the regional office of the Deutsche Bundesbank in Saxony and Thuringia. The author gratefully acknowledges the generosity and hospitality of his colleges. The author is also thankful for the financial support of the Graduate Academy, Technische Universität Dresden, financed by The Excellence Initiative of the German Federal Ministry of Education and Research (BMBF) and the German Research Foundation (DFG).
Citation
Walther, T. (2017), "Expected shortfall in the presence of asymmetry and long memory: An application to Vietnamese stock markets", Pacific Accounting Review, Vol. 29 No. 2, pp. 132-151. https://doi.org/10.1108/PAR-06-2016-0063
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited