Related papers: Assessing Financial Model Risk
Measuring model risk is required by regulators on financial and insurance markets. We separate model risk into parameter estimation risk and model specification risk, and we propose expected shortfall type model risk measures applied to…
This paper describes measures for evaluating the three determinants of how well a probabilistic classifier performs on a given test set. These determinants are the appropriateness, for the test set, of the results of (1) feature selection,…
Models continue to increase their already broad use across industry as well as their sophistication. Worldwide regulation oblige financial institutions to manage and address model risk with the same severity as any other type of risk, which…
Model risk measures consequences of choosing a model in a class of possible alternatives. We find analytical and simulated bounds for payoff functions on classes of plausible alternatives of a given discrete model. We measure the impact of…
The issue of model risk in default modeling has been known since inception of the Academic literature in the field. However, a rigorous treatment requires a description of all the possible models, and a measure of the distance between a…
This paper introduces a relative model risk measure of a product priced with a given model, with respect to another reference model for which the market is assumed to be driven. This measure allows comparing products valued with different…
Model uncertainty has been one prominent issue both in the theory of risk measures and in practice such as financial risk management and regulation. Motivated by this observation, in this paper, we take a new perspective to describe the…
We focus on two particular aspects of model risk: the inability of a chosen model to fit observed market prices at a given point in time (calibration error) and the model risk due to recalibration of model parameters (in contradiction to…
Procyclicality of historical risk measure estimation means that one tends to over-estimate future risk when present realized volatility is high and vice versa under-estimate future risk when the realized volatility is low. Out of it…
We present a general framework for measuring the liquidity risk. The theoretical framework defines a class of risk measures that incorporate the liquidity risk into the standard risk measures. We consider a one-period risk measurement…
This survey gives an introduction to monetary measures of risk as monotone and cash additive functions on spaces of univariate random variables. Primal and dual representation results as well as several examples are discussed. Principal…
The purpose of this paper is to describe and extend the use of the newly-introduced measure, residual estimation risk. Following the seminal work of Bignozzi and Tsanakas, the quantification of residual estimation risk is proposed in a…
We propose to interpret distribution model risk as sensitivity of expected loss to changes in the risk factor distribution, and to measure the distribution model risk of a portfolio by the maximum expected loss over a set of plausible…
Systemic risk refers to the risk that the financial system is susceptible to failures due to the characteristics of the system itself. The tremendous cost of systemic risk requires the design and implementation of tools for the efficient…
The paper has 2 main goals: 1. We propose a variant of the CAPM based on coherent risk. 2. In addition to the real-world measure and the risk-neutral measure, we propose the third one: the extreme measure. The introduction of this measure…
A risk analyst assesses potential financial losses based on multiple sources of information. Often, the assessment does not only depend on the specification of the loss random variable but also various economic scenarios. Motivated by this…
"What are the origins of risks?" and "How material are they?" -- these are the two most fundamental questions of any risk analysis. Quantitative Structuring -- a technology for building financial products -- provides economically meaningful…
The new notion of maturity-independent risk measures is introduced and contrasted with the existing risk measurement concepts. It is shown, by means of two examples, one set on a finite probability space and the other in a diffusion…
In this paper, we discuss aspects of model risk management in financial institutions which could be adopted by academic institutions to improve the process of conducting academic research, identify and mitigate existing limitations,…
Backtesting risk measures is a central task in financial regulation. While standard backtests evaluate whether a forecasting model is statistically consistent with observed losses, regulatory practice often requires assessing the…