This is an issue on the host's computer (the person attempting to host a game). Below are the things that can cause it.
HDR is active
Parsec doesn't support HDR. If the host computer has it turned on, turn it off by going to the Display Settings > Windows HD Color > Play HDR games and apps.
Arcade Beta: The game is using Reshade
Reshade can also cause this error for games being hosted on the Arcade. If you're using Reshade, remove it from the game before hosting it.
The resolution is too high
If the host computer's resolution is higher than its graphics card can encode, then the resolution needs to be lowered. AMD's encoder is especially known for this.
The resolution is changed through Windows' display settings if friends are joining. You should try something like 1280x720, and increase it from there to see what works.
If you're joining yourself, you'll also need to be aware of Parsec's settings > Host > Resolution, which will automatically switch the display to that resolution when joining. Setting a lower resolution through just Parsec may not fix the error, so in that case change it through Windows and set Parsec to "Keep host resolution".