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Blame the models

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Author Info

  • Daníelsson, Jón

Abstract

The quality of statistical risk models is much lower than often assumed. Such models are useful for measuring the risk of frequent small events, such as in internal risk management, but not for systemically important events. Unfortunately, it is common to see unrealistic demands placed on risk models. Having a number representing risk seems to be more important than having a number which is correct. Here, it is demonstrated that even in what may be the easiest and most reliable modeling exercise, value-at-risk forecasts from the most commonly used risk models provide very inconsistent results.

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File URL: http://www.sciencedirect.com/science/article/B7CRR-4THSX5H-8/2/561095e62c3cfb111101e84343b7c0b3
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 4 (2008)
Issue (Month): 4 (December)
Pages: 321-328

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Handle: RePEc:eee:finsta:v:4:y:2008:i:4:p:321-328

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Web page: http://www.elsevier.com/locate/jfstabil

Related research

Keywords: Value-at-risk Risk models Credit rating Endogenous risk Regulation by models;

References

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  1. Jon Danielsson, 2000. "The Emperor has no Clothes: Limits to Risk Modelling," FMG Special Papers sp126, Financial Markets Group.
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Cited by:
  1. Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123 Central Bank of Chile.
  2. Mario Tonveronachi & Elisabetta Montanaro, 2009. "Some preliminary proposals for re-regulating financial systems," Department of Economics University of Siena 553, Department of Economics, University of Siena.

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