Model risk of risk models

Jon Danielsson, Kevin R. James, Marcela Valenzuela and Ilknur Zer

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with market uncertainty. During calm periods, the underlying risk forecast models produce similar risk readings; hence, model risk is typically negligible. However, the disagreement between the various candidate models increases significantly during market distress, further frustrating the reliability of risk readings. Finally, particular conclusions on the underlying reasons for the high model risk and the implications for practitioners and policy makers are discussed.

Keywords: model risk; systemic risk; value-at-risk; expected shortfall; Basel III (search for similar items in EconPapers)
JEL-codes: G10 G18 G20 G28 G38 (search for similar items in EconPapers)
Date: 2016-02-23
New Economics Papers: this item is included in nep-cfn, nep-for and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64)

Published in Journal of Financial Stability, 23, February, 2016, 23, pp. 79-91. ISSN: 1572-3089

Downloads: (external link)
http://eprints.lse.ac.uk/66365/ Open access version. (application/pdf)

Related works:
Journal Article: Model risk of risk models (2016)
Working Paper: Model risk of risk models (2014)
Working Paper: Model Risk of Risk Models (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:66365

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