On the Impact of Long Memory on Market Risk

Abstract

This chapter investigates the influence of the long memory behavior in returns and volatility on the market risk for four emerging stock markets during the pre- and post-crisis periods. In this respect, the authors consider four major political events (Tunisian revolution, Egyptian revolution, assassination of Prime Minister Rafik El Hariri, and a series of suicide bombings in Morocco). Using the modified R/S test and GPH test, they show the long memory property in returns and volatility over the two sub-periods. To explore the dual long memory property, the authors apply the joint ARFIMA–FIGARCH specification on the returns and volatility of the four emerging stock markets. The dual long memory property is prevalent in the returns and volatility of the emerging stock markets over the pre-crisis period. During the post-crisis period, the dual long memory process is only detected in the Moroccan market. The authors also display the dynamic behavior of VaR during the two sub-periods. In addition, based on the backtesting test, VaR performed better during the two sub-periods for all countries.