The analysis of the modified RiskMetrics models performance on emerging markets: A case study of financial markets of former Yugoslav countries

Abstract

In this paper the authors analyze the performance of modified RiskMetrics models on emerging markets. Some modifications of the standard RiskMetrics model have been made in order to adjust RiskMetrics methodology to the characteristics of the emerging markets. These modifications include the incorporation of the regularGARCH model, GARCH model based on the assumption that innovations follow Student t distribution, and nonlinear GARCH model into the standard RiskMetrics methodology. Tests were performed on emerging financial markets of former Yugoslav countries with the objective of answering the question of what is more important: the specification of volatility model or the assumption about distribution of innovations for improvingRisk Metrics model applicability on the emerging markets.