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ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
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http://hdl.handle.net/10419/26276
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| Title: | | Model Averaging in Risk Management with an Application to Futures Markets  |
| Authors: | | Pesaran, Mohammad Hashem Schleicher, Christoph Zaffaroni, Paolo |
| Issue Date: | | 2008 |
| Series/Report no.: | | CESifo working paper 2231 |
| 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. Evaluation of volatility models is then considered and a simple Value-at-Risk (VaR) diagnostic test is proposed for individual as well as average models. The asymptotic as well as the exact finite-sample distribution of the test statistic, dealing with the possibility of parameter uncertainty, are established. The model averaging idea and the VaR diagnostic tests are illustrated by an application to portfolios of daily returns on six currencies, four equity indices, four ten year government bonds and four commodities over the period 1991-2007. The empirical evidence supports the use of thick model averaging strategies over single models or Bayesian type model averaging procedures. |
| Subjects: | | model averaging Value-at-Risk decision based evaluations |
| JEL: | | C32 C52 C53 G11 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CESifo Working Papers, CESifo Group Munich
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