Model Risk of Risk Models

Jon Danielsson, Kevin James, Marcela Valenzuela and Ilknur Zer
Additional contact information
Ilknur Zer: https://www.federalreserve.gov/econres/ilknur-zer.htm

No 2014-34, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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 and caused by 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, with a no obvious way to identify which method is the best. Finally, we discuss the main problems in risk forecasting for macro prudential purposes and propose an evaluation criteria for such models.

Keywords: Value-at-Risk; expected shortfall; systemic risk; financial stability; Basel III; CoVaR; MES (search for similar items in EconPapers)
Pages: 33 pages
Date: 2014-04-16
New Economics Papers: this item is included in nep-ban, nep-for and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/2014/201434/201434pap.pdf Full text (application/pdf)

Related works:
Journal Article: Model risk of risk models (2016)
Working Paper: Model risk of risk models (2016)
Working Paper: Model risk of risk models (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2014-34

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().