Historical VaR method and Cornish-Fisher Approximation: Efficacy Against Unlikely Risks in Financial Engineering; The case of Covid-19 in Moroccan Financial Market

Historical VaR method and Cornish-Fisher Approximation: Efficacy Against Unlikely Risks in Financial Engineering; The case of Covid-19 in Moroccan Financial Market
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© 2022 by IJETT Journal
Volume-70 Issue-10
Year of Publication : 2022
Authors : Abdelmonsif Hichmani, Driss Gretete
DOI : 10.14445/22315381/IJETT-V70I10P221

How to Cite?

Abdelmonsif Hichmani, Driss Gretete, "Historical VaR method and Cornish-Fisher Approximation: Efficacy Against Unlikely Risks in Financial Engineering; The case of Covid-19 in Moroccan Financial Market," International Journal of Engineering Trends and Technology, vol. 70, no. 10, pp. 221-231, 2022. Crossref, https://doi.org/10.14445/22315381/IJETT-V70I10P221

Abstract
Covid-19 hit the global economy, its impact on global supply chains and financial operations was clear, and it showed the importance of managing unlikely risks. To manage the impact of such risks, analytical tools are needed. These tools can provide decision-makers with ways to confront these risks[1]. This article assesses the impact of Covid-19, a concrete example of unlikely risks: it's a sanitary risk on the Moroccan stock market. This evaluation consists first of choosing optimal investments that minimize the risk of loss for expected returns, based on the Markowitz model, which was awarded the Nobel Prize in Economics in 1990. This choice was made at the beginning of the covid-19 pandemic in Morocco. Then estimate the maximum loss for these investments, which should not exceed using the Historical VaR and Cornish-Ficher VaR calculation methods. Finally, it compared real losses with estimated losses to highlight the need to consider unlikely risks during financial engineering and risk management. The two methods: Historical VaR and CornishFisher VaR, are chosen because they don't impose the normality assumption on return distributions. The Cornish-Fisher VaR approximation is generally used for crisis management. Its novelty consists of testing these methods' efficiency against unlikely risks and precisely against the sanitary risk. Existing researches suggest risking managers use Cornish Fisher VaR in time of crisis. This work demonstrates that the Cornish Fisher VaR overestimates losses and that more research is needed to estimate them better using the Extreme value theory.

Keywords
Unlikely risks, Extreme value theory, Financial engineering, Markowitz model, Value at Risk.

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