Related papers: Model Risk in Credit Portfolio Models
It is no secret that many projects fail, regardless of the business sector, software projects are notoriously disaster victims, not necessarily because of technological failure, but more often due to their uncertainties. The threats…
Due to lack of scientific understanding, some mechanisms may be missing in mathematical modeling of complex phenomena in science and engineering. These mathematical models thus contain some uncertainties such as uncertain parameters. One…
Machine learning methods have garnered increasing interest among actuaries in recent years. However, their adoption by practitioners has been limited, partly due to the lack of transparency of these methods, as compared to generalized…
Declarative approaches to process modeling are regarded as well suited for highly volatile environments as they provide a high degree of flexibility. However, problems in understanding and maintaining declarative business process models…
We study a credit risk model which captures effects of economic interactions on a firm's default probability. Economic interactions are represented as a functionally defined graph, and the existence of both cooperative, and competitive,…
We introduce a general decision tree framework to value an option to invest/divest in a project, focusing on the model risk inherent in the assumptions made by standard real option valuation methods. We examine how real option values depend…
Current approaches to building general-purpose AI systems tend to produce systems with both beneficial and harmful capabilities. Further progress in AI development could lead to capabilities that pose extreme risks, such as offensive cyber…
We review the recently introduced concept of variety of a financial portfolio and we sketch its importance for risk control purposes. The empirical behaviour of variety, correlation, exceedance correlation and asymmetry of the probability…
We explore the use of deep learning hierarchical models for problems in financial prediction and classification. Financial prediction problems -- such as those presented in designing and pricing securities, constructing portfolios, and risk…
In medicine, both ethical and monetary costs of incorrect predictions can be significant, and the complexity of the problems often necessitates increasingly complex models. Recent work has shown that changing just the random seed is enough…
All people have to make risky decisions in everyday life. And we do not know how true they are. But is it possible to mathematically assess the correctness of our choice? This article discusses the model of decision making under risk on the…
Lending decisions are usually made with proprietary models that provide minimally acceptable explanations to users. In a future world without such secrecy, what decision support tools would one want to use for justified lending decisions?…
Due to the penetration of renewable energy resources and load deviation, uncertainty handling is one of the main challenges for power system; therefore the need for accurate decision-making in a power system under the penetration of…
Extreme volatility, nonlinear dependencies, and systemic fragility are characteristics of cryptocurrency markets. The assumptions of normality and centralized control in traditional financial risk models frequently cause them to miss these…
Decisions on how to manage future flood risks are frequently informed by both sophisticated and computationally expensive models. This complexity often limits the representation of uncertainties and the consideration of strategies. Here, we…
The probability minimizing problem of large losses of portfolio in discrete and continuous time models is studied. This gives a generalization of quantile hedging presented in [3].
Analytical, free of time consuming Monte Carlo simulations, framework for credit portfolio systematic risk metrics calculations is presented. Techniques are described that allow calculation of portfolio-level systematic risk measures…
Safety cases become increasingly important for software certification. Models play a crucial role in building and combining information for the safety case. This position paper sketches an ideal model-based safety case with defect…
The latest financial crisis has painfully revealed the dangers arising from a globally interconnected financial system. Conventional approaches based on the notion of the existence of equilibrium and those which rely on statistical…
By treating the financial market as a thermodynamic system, we establish a one-to-one correspondence between thermodynamic variables and economic quantities. Measured by the expected loss under the worst-case scenario, financial risk caused…