Economics, Econometrics and Finance
2 years ago

Choice of Copulas Determines Model Risk in Multivariate Risk Forecasting.

arXiv (Cornell University)
Marginals Versus Copulas: Which Account For More Model Risk In Multivariate Risk Forecasting?
Simon Fritzsch, Maike Timphus, Gregor Weiß

Paper Summary

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The study compared different models for predicting portfolio risk and found that the choice of copula models, not marginal models, is the main source of model risk. Model risk is highest during crises and can be reduced by using a model confidence set procedure. This approach significantly improves the accuracy of risk forecasts.