Journal of Risk
ISSN:
1465-1211 (print)
1755-2842 (online)
Editor-in-chief: Farid AitSahlia
Applying the Cornish–Fisher expansion to value-at-risk estimation in Islamic banking
Hylmun Izhar
Abstract
ABSTRACT
Methodological-empirical analysis of risk management in Islamic banking is rather scarce. This is due to either a lack of comprehensive understanding in the latest development of empirical modeling or analysts'failure to grasp the underlying assumptions that underpin the model. Such an inability could be detrimental, particularly in the investigation of operational risk exposures in Islamic banking. This study therefore contributes to this field by deliberating upon a proposed delta-gamma sensitivity analysis-extreme value theory (DGSA-EVT) model that focuses on the assessment of risk exposures represented by the value of value-at-risk (VaR) in three incomegenerating channels: one in investment, one in financing and one in services. A data analysis demonstrates that risk variables in this study exhibit nonnormality, which understandably does not fit with the underlying assumption of VaR, namely the normality of the variables under the analysis. Hence, in order to mitigate this, our study employs a parametric approach called the Cornish-Fisher expansion, under which the confidence interval of assigned risk variables is a function of their respective skewness, kurtosis and volatility. Such an approach has proven to be effective in mitigating the likelihood of over- or underestimating theVaR in the income-generation channels analyzed as a result of misaddressing the nonnormality of risk variables.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net