Model Averaging and Value-at-Risk Based Evaluation of Large Multi Asset Volatility Models for Risk Management

Mohammad Pesaran and Paolo Zaffaroni

No 1358, CESifo Working Paper Series from CESifo

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.

Keywords: model averaging; value-at-risk; decision based evaluation (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-ecm and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp1358.pdf (application/pdf)

Related works:
Working Paper: Model Averaging and Value-at-Risk Based Evaluation of Large Multi-Asset Volatility Models for Risk Management (2005)
Working Paper: Model Averaging and Value-at-Risk based Evaluation of Large Multi Asset Volatility Models for Risk Management (2004)
Working Paper: Model Averaging and Value-at-Risk based Evaluation of Large Multi Asset Volatility Models for Risk Management (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1358

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().