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Title:Model averaging and value-at-risk based evaluation of large multi asset volatility models for risk management PDF Logo
Authors:Pesaran, Mohammad Hashem
Zaffaroni, Paolo
Issue Date:2004
Series/Report no.:CESifo working papers 1358
Abstract:This paper considers the problem of model uncertainty in the case of multi-asset volatility models and discusses the use of model averaging techniques as a way of dealing with the risk of inadvertently using false models in portfolio management. In particular, it is shown that under certain conditions portfolio returns based on an average model will be more fat-tailed than if based on an individual underlying model with the same average volatility. Evaluation of volatility models is also considered and a simple Value-at-Risk (VaR) diagnostic test is proposed for individual as well as ?average? models and its exact and asymptotic properties are established. The model averaging idea and the VaR diagnostic tests are illustrated by an application to portfolios of daily returns based on twenty two of Standard & Poor?s 500 industry group indices over the period January 2, 1995 to October 13, 2003, inclusive.
Subjects:model averaging
value-at-risk
decision based evaluation
JEL:C32
C53
G11
C52
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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