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The Riskiness of Risk Models

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Abstract

We provide an economic valuation of the riskiness of risk models by directly measuring the impact of model risks (specification and estimation risks) on VaR estimates. We find that integrating the model risk into the VaR computations implies a substantial minimum correction of the order of 10-40% of VaR levels. We also present results of a practical method Ñ based on a backtesting framework Ñ for incorporating the model risk into the VaR estimates.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2011/11020.pdf
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Bibliographic Info

Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 11020.

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Length: 14 pages
Date of creation: Mar 2011
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Handle: RePEc:mse:cesdoc:11020

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Keywords: Model risk; quantile estimation; VaR; Basel II validation test.;

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  1. Yacine Aït-Sahalia & Julio Cacho-Diaz & Roger J.A. Laeven, 2010. "Modeling Financial Contagion Using Mutually Exciting Jump Processes," NBER Working Papers 15850, National Bureau of Economic Research, Inc.
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Cited by:
  1. Christophe Boucher & Gregory Jannin & Patrick Kouontchou & Bertrand Maillet, 2013. "An Economic Evaluation of Model Risk in Long-term Asset Allocations," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 475-491, 08.

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