In particular, the authors find that using a standard two-moment value-at-risk (VaR) measure, which assumes normally distributed returns, rather than a four-moment VaR, which incorporates an asset skewness and kurtosis, can lead to a substantial underestimation of portfolio risk during the most extreme market conditions. Findings - The most important finding relates to the estimation of portfolio tail-risk. Furthermore, the authors use the modified value-at-risk (Favre and Galeano, 2002), which incorporates higher statistical moments, to measure the performance of portfolios during both crisis and bullish regimes. Design/methodology/approach - The authors useEngle’s (2002)DCC-GARCH model to study the dynamic conditional correlations between asset classes. Purpose - Using a convenient tail-risk measure of performance, this paper aims to explore the extent to which incorporating higher statistical moments such as an assets skewness and kurtosis, provides further insight into the potential benefits of asset-class diversification within the realm of Islamic finance.
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