Jiří Panoš, Petr Polák
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.
JEL codes: C11, C22, C51, C52, E58, G21
Keywords: Bayesian model averaging, model selection, model uncertainty, probability of default, stress testing
Issued: December 2019
Download: CNB WP No. 9/2019 (pdf, 1.3 MB)