Model risk management: Valuation and governance of pseudo-models

C. Gourieroux and Alain Monfort

Econometrics and Statistics, 2021, vol. 17, issue C, 1-22

Abstract: The standard estimation approaches and their implementation generally assume well-specified models. What is feasible and unfeasible when the models are misspecified is discussed. An adjustment method is introduced for forecasts based on misspecified models. The key roles of the object of interest and of the management of validation samples are highlighted. The approach is used to derive forecast intervals robust to misspecification, to quantify the required capital for model risk in prudential supervision, to measure treatment effects with pseudo-models, or to jointly manage a set of pseudo-models.

Keywords: Misspecification; Audit; Model Valuation; Scoring; Model Risk; Validation Sample; Difference of Difference; Prudential Regulation; Model Choice; Treatment Effect (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosta:v:17:y:2021:i:c:p:1-22

DOI: 10.1016/j.ecosta.2020.08.001

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