Assessing financial model risk

Pauline Barrieu and Giacomo Scandolo

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

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)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

Published in European Journal of Operational Research, 2014, 242(2), pp. 546-556. ISSN: 0377-2217

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:60084

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