This is from the madVR FAQ in the second post of the madVR thread at Doom9:
A) Which output format (RGB vs YCbCr, 0-255 vs 16-235) should I activate in my GPU control panel?
Windows internally always "thinks" in RGB 0-255. Windows considers black to be 0 and white to be 255. That applies to the desktop, applications, games and videos. Windows itself never really thinks in terms of YCbCr or 16-235. Windows does know that videos might be YCbCr or 16-235, but still, all rendering is always done at RGB 0-255. (The exception proves the rule.)
So if you switch your GPU control panel to RGB 0-255, the GPU receives RGB 0-255 from Windows, and sends RGB 0-255 to the TV. Consequently, the GPU doesn't have to do any colorspace (RGB -> YCbCr) or range (0-255 -> 16-235) conversions. This is the best setup, because the GPU won't damage our precious pixels.
If you switch your GPU control panel to RGB 16-235, the GPU receives RGB 0-255 from Windows, but you ask the GPU to send 16-235 to the TV. Consequently, the GPU has to stretch the pixel data behind Windows' back in such a way that a black pixel is no longer 0, but now 16. And a white pixel is no longer 255, but now 235. So the pixel data is condensed from 0-255 to 16-235, and all the values between 0-15 and 236-255 are basically unused. Some GPU drivers might do this in high bitdepth with dithering, which may produce acceptable results. But some GPU drivers definitely do this in 8bit without any dithering which will introduce lots of nasty banding artifacts into the image. As a result I cannot recommend this configuration.
If you switch your GPU control panel to YCbCr, the GPU receives RGB from Windows, but you ask the GPU to send YCbCr to the TV. Consequently, the GPU has to convert the RGB pixels behind Windows' back to YCbCr. Some GPU drivers might do this in high bitdepth with dithering, which may produce acceptable results. But some GPU drivers definitely do this in 8bit without any dithering which will introduce lots of nasty banding artifacts into the image. Furthermore, there are various different RGB <-> YCbCr matrixes available. E.g. there's one each for BT.601, BT.709 and BT.2020. Now which of these will the GPU use for the conversion? And which will the TV use to convert back to RGB? If the GPU and the TV use different matrixes, color errors will be introduced. As a result I cannot recommend this configuration.
Summed up: In order to get the best possible image quality, I strongly recommend to set your GPU control panel to RGB Full (0-255).
There's one problem with this approach: If your TV doesn't have an option to switch between 0-255 and 16-235, it may always expect black to be 16 (TVs usually default to 16-235 while computer monitors usually default to 0-255). But we've just told the GPU to output black at 0! That can't work, can it? Actually, it can, surprisingly - but only for video content. You can tell madVR to render to 16-235 instead of 0-255. This way madVR will make sure that black pixels get a pixel value of 16, but the GPU doesn't know about it, so the GPU can't screw image quality up for us. So if your TV absolutely requires to receive black as 16, then still set your GPU control panel to RGB 0-255 and set madVR to 16-235. If your GPU supports 0-255, then set everything (GPU control panel, TV and madVR) to 0-255.
Unfortunately, if you want application and games to have correct black & white levels, too, all the above advice might not work out for you. If your TV doesn't support RGB 0-255, then somebody somewhere has to convert applications and games from 0-255 to 16-235, so your TV displays black & white correctly. madVR can only do this for videos, but madVR can't magically convert applications and games for you. So in this situation you may have no other choice than to set your GPU control panel to RGB 16-235 or to YCbCr. But please be aware of that you might get lower image quality this way, because the GPU will have to convert the pixels behind the back of both Windows and madVR, and GPU drivers often do this in inferior quality.