Determining Risk Model Confidence Sets

16 Pages Posted: 10 Feb 2017

See all articles by Mark Cummins

Mark Cummins

Dublin City University Business School

Michael M. Dowling

ESC Rennes School of Business

Francesco Esposito

Dublin City University Business School

Date Written: February 9, 2017

Abstract

Two alternative approaches to identifying a model confidence set (MCS) are contrasted. Together with a specification of the established MCS test, we present a new version of a test that identifies a model set satisfying the MCS requirements and is characterised by an alternative model ranking p-value. We also contrast the two MCS approaches empirically, constructing a market risk model selection exercise for the Dow Jones Industrial Average. Our adapted MCS method is shown to lead to a smaller MCS, nested within the MCS determined by the popular MCS method, and allows greater distinction between models.

Keywords: model confidence set, model selection, market risk models

JEL Classification: C53, G11, G12

Suggested Citation

Cummins, Mark and Dowling, Michael M. and Esposito, Francesco, Determining Risk Model Confidence Sets (February 9, 2017). Finance Research Letters, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2914149 or http://dx.doi.org/10.2139/ssrn.2914149

Mark Cummins

Dublin City University Business School ( email )

Dublin 9
Ireland

Michael M. Dowling (Contact Author)

ESC Rennes School of Business ( email )

Rue Robert d'arbrissel, 2
Rennes, 35000
France

Francesco Esposito

Dublin City University Business School ( email )

Dublin 9
Ireland

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