Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26276
Authors: 
Pesaran, Mohammad Hashem
Schleicher, Christoph
Zaffaroni, Paolo
Year of Publication: 
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

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