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Model Risk Management: Limits and Future of Bayesian Approaches

Author

Listed:
  • J.P. Florens
  • C. Gourieroux
  • A. Monfort

Abstract

This paper discusses the use of Bayesian approaches when the models are misspecified (model risk). In particular we explore the limits and future of Bayesian approaches in order to provide answers to the following questions recently asked by the prudential supervision for Finance/Insurance: How to measure model risk? How to use in a coherent way the different misspecified models (as rating models) usually employed within and between financial institutions.

Suggested Citation

  • J.P. Florens & C. Gourieroux & A. Monfort, 2019. "Model Risk Management: Limits and Future of Bayesian Approaches," Annals of Economics and Statistics, GENES, issue 136, pages 1-26.
  • Handle: RePEc:adr:anecst:y:2019:i:136:p:1-26
    DOI: 10.15609/annaeconstat2009.136.0001
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    File URL: https://www.jstor.org/stable/10.15609/annaeconstat2009.136.0001
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    More about this item

    Keywords

    Model Risk; Bayesian Approach; Model Choice; Validation.;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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