Assessing financial model risk

Pauline Barrieu and Giacomo Scandolo ()

European Journal of Operational Research, 2015, vol. 242, issue 2, 546-556

Abstract: Model risk has a huge impact on any risk measurement procedure and its quantification is therefore a crucial step. In this paper, we introduce three quantitative measures of model risk when choosing a particular reference model within a given class: the absolute measure of model risk, the relative measure of model risk and the local measure of model risk. Each of the measures has a specific purpose and so allows for flexibility. We illustrate the various notions by studying some relevant examples, so as to emphasize the practicability and tractability of our approach.

Keywords: Finance; Risk management; Robustness and sensitivity analysis (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (37)

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Working Paper: Assessing Financial Model Risk (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:242:y:2015:i:2:p:546-556

DOI: 10.1016/j.ejor.2014.10.032

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