The Model Confidence Set package for R

Bernardi MauroCatania Leopoldo
CEIS Research Paper
This paper presents the R package MCS which implements the Model Confidence Set (MCS) procedure recently developed by Hansen, Lunde, and Nason (2011). The Hansen's procedure consists on a sequence of tests which permits to construct a set of "superior" models, where the null hypothesis of Equal Predictive Ability (EPA) is not rejected at a certain confidence level. The EPA statistic tests is calculated for an arbitrary loss function, meaning that we could test models on various aspects, for example punctual forecasts. The relevance of the package is shown using an example which aims at illustrating in details the use of the functions provided by the package. The example compares the ability of different models belonging to the ARCH family to predict large financial losses. We also discuss the implementation of the ARCH{type models and their maximum likelihood estimation using the popular R package rugarch developed by Ghalanos (2014).

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Number: 362
Keywords: Hypothesis testing, Model Confidence Set, Value{at{Risk, VaR combination, ARCH-Models, R-CRAN
Volume: 13
Issue: 11
Date: Tuesday, November 17, 2015
Revision Date: Tuesday, November 17, 2015