Model Risk Measurement under Wasserstein Distance

Yu Feng and Erik Schl\"ogl
Authors registered in the RePEc Author Service: Erik Schlogl

Papers from arXiv.org

Abstract: The paper proposes a new approach to model risk measurement based on the Wasserstein distance between two probability measures. It formulates the theoretical motivation resulting from the interpretation of fictitious adversary of robust risk management. The proposed approach accounts for equivalent and non-equivalent probability measures and incorporates the economic reality of the fictitious adversary. It provides practically feasible results that overcome the restriction of considering only models implying probability measures equivalent to the reference model. The Wasserstein approach suits for various types of model risk problems, ranging from the single-asset hedging risk problem to the multi-asset allocation problem. The robust capital market line, accounting for the correlation risk, is not achievable with other non-parametric approaches.

Date: 2018-09, Revised 2019-03
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

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http://arxiv.org/pdf/1809.03641 Latest version (application/pdf)

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Working Paper: Model Risk Measurement Under Wasserstein Distance (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1809.03641

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