How to Improve the Model Selection Procedure in a Stress-testing Framework

Jiri Panos and Petr Polak

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: This paper aims to introduce a contemporary, computing-power-driven approach to econometric modeling in a stress-testing framework. The presented approach explicitly takes into account model uncertainty of satellite models used for projecting forward paths of financial variables employing the constrained Bayesian model averaging (BMA) technique. The constrained BMA technique allows for selecting models with reasonably severe but plausible trajectories conditional on given macro-financial scenarios. It also ensures that the modeling is conducted in a sufficiently robust and prudential manner despite the limited time-series length for the explained and/or explanatory variables.

Keywords: Bayesian model averaging; model selection; model uncertainty; probability of default; stress testing (search for similar items in EconPapers)
JEL-codes: C11 C22 C51 C52 E58 G21 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-mac, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2019/9

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