About the Impact of Model Risk on Capital Reserves: A Quantitative Analysis
AbstractThis paper analyzes and quantifies the idea of model risk in the environment of internal model building. We define various types of model risk including estimation risk, model risk in distribution and model risk in functional form. By the quantification of these concepts we analyze the impact of the modeling process of an econometric model on the resulting company model. Utilizing real insurance data we specify, estimate and simulate various linear and nonlinear time series models for the inflation rate and examine its impact on pension liabilities under the aspect of model risk. Under consideration of different risk measures it is shown that model risk can differ profoundly due to the specification process of the econometric model resulting in remarkable monetary differences concerning capital reserves. We furthermore propose a specification strategy for univariate time series models and demonstrate that thereby market risk and capital reserves can be reduced distinctively.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover with number dp-469.
Length: 28 pages
Date of creation: Mar 2011
Date of revision:
Model risk; Estimation risk; Misspecification risk; Basel multiplication factor; Empirical model specification; Capital reserves;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-02 (All new papers)
- NEP-CBA-2011-04-02 (Central Banking)
- NEP-CMP-2011-04-02 (Computational Economics)
- NEP-RMG-2011-04-02 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hassler, Uwe & Wolters, Jurgen, 1995. "Long Memory in Inflation Rates: International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 37-45, January.
- Davidson, James & Sibbertsen, Philipp, 2009.
"Tests of bias in log-periodogram regression,"
Elsevier, vol. 102(2), pages 83-86, February.
- James Davidson & Philipp Sibbertsen, 2008. "Tests of Bias in Log-Periodogram Regression," Discussion Papers 0805, Exeter University, Department of Economics.
- Davidson, James & Sibbertsen, Philipp, 2005. "Tests of Bias in Log-Periodogram Regression," Diskussionspapiere der Wirtschaftswissenschaftlichen FakultÃ¤t der Leibniz UniversitÃ¤t Hannover dp-317, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
- Diebold, Francis X. & Inoue, Atsushi, 2001.
"Long memory and regime switching,"
Journal of Econometrics,
Elsevier, vol. 105(1), pages 131-159, November.
- Andros Gregoriou & Alexandros Kontonikas, 2006.
"Inflation Targeting And The Stationarity Of Inflation: New Results From An Estar Unit Root Test,"
Bulletin of Economic Research,
Wiley Blackwell, vol. 58(4), pages 309-322, October.
- Andros Gregoriou & Alexandros Kontonikas, 2005. "Inflation Targeting and the Stationarity of Inflation: New Results from an ESTAR Unit Root Test," Working Papers 2005_10, Business School - Economics, University of Glasgow.
- Joshua V. Rosenberg & Til Schuermann, 2004.
"A general approach to integrated risk management with skewed, fat-tailed risks,"
185, Federal Reserve Bank of New York.
- Rosenberg, Joshua V. & Schuermann, Til, 2006. "A general approach to integrated risk management with skewed, fat-tailed risks," Journal of Financial Economics, Elsevier, vol. 79(3), pages 569-614, March.
- Pena, Daniel & Rodriguez, Julio, 2005. "Detecting nonlinearity in time series by model selection criteria," International Journal of Forecasting, Elsevier, vol. 21(4), pages 731-748.
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- John P. Judd & Glenn D. Rudebusch, 1998. "Taylor's rule and the Fed, 1970-1997," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
- Kerkhof, Jeroen & Melenberg, Bertrand & Schumacher, Hans, 2010. "Model risk and capital reserves," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 267-279, January.
- Ding, Zhuanxin & Granger, Clive W. J., 1996. "Modeling volatility persistence of speculative returns: A new approach," Journal of Econometrics, Elsevier, vol. 73(1), pages 185-215, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dietrich, Karl).
If references are entirely missing, you can add them using this form.