The Impact of Parameter and Model Uncertainty on Market Risk Predictions from GARCH-Type Models

Journal of Forecasting, 36(7), pp. 808–823, 2017

32 Pages Posted: 12 Nov 2015 Last revised: 22 Jul 2019

See all articles by David Ardia

David Ardia

HEC Montreal - Department of Decision Sciences

Jeremy Kolly

affiliation not provided to SSRN

Denis-Alexandre Trottier

Laval University, Faculté d'Administration, Département de Finance et Assurance, Students

Date Written: March 3, 2017

Abstract

We study the impact of parameter and model uncertainty on the left-tail of predictive densities and in particular on VaR forecasts. To this end, we evaluate the predictive performance of several GARCH-type models estimated via Bayesian and maximum likelihood techniques. In addition to individual models, several combination methods are considered such as Bayesian model averaging and (censored) optimal pooling for linear, log or beta linear pools. Daily returns for a set of stock market indexes are predicted over about 13 years from the early 2000s. We find that Bayesian predictive densities improve the VaR backtest at the 1% risk level for single models and for linear and log pools. We also find that the robust VaR backtest exhibited by linear and log pools is better than the one of single models at the 5% risk level. Finally, the equally-weighted linear pool of Bayesian predictives tends to be the best VaR forecaster in a set of 42 forecasting techniques.

Keywords: GARCH models, Bayesian and frequentist estimation, predictive density combination, beta linear pool, censored optimal pooling, backtesting

JEL Classification: C53, C58, G17, G32

Suggested Citation

Ardia, David and Kolly, Jeremy and Trottier, Denis-Alexandre, The Impact of Parameter and Model Uncertainty on Market Risk Predictions from GARCH-Type Models (March 3, 2017). Journal of Forecasting, 36(7), pp. 808–823, 2017, Available at SSRN: https://ssrn.com/abstract=2688633 or http://dx.doi.org/10.2139/ssrn.2688633

David Ardia

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Jeremy Kolly (Contact Author)

affiliation not provided to SSRN

Denis-Alexandre Trottier

Laval University, Faculté d'Administration, Département de Finance et Assurance, Students ( email )

Pavillon Palasis-Prince
Quebec, Quebec G1K 7P4
Canada

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