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Assessing financial model risk

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  • Barrieu, Pauline
  • Scandolo, Giacomo

Abstract

Model risk has a huge impact on any risk measurement procedure and its quantification is therefore a crucial step. In this paper, we introduce three quantitative measures of model risk when choosing a particular reference model within a given class: the absolute measure of model risk, the relative measure of model risk and the local measure of model risk. Each of the measures has a specific purpose and so allows for flexibility. We illustrate the various notions by studying some relevant examples, so as to emphasize the practicability and tractability of our approach.

Suggested Citation

  • Barrieu, Pauline & Scandolo, Giacomo, 2015. "Assessing financial model risk," European Journal of Operational Research, Elsevier, vol. 242(2), pages 546-556.
    • Handle: RePEc:eee:ejores:v:242:y:2015:i:2:p:546-556
    DOI: 10.1016/j.ejor.2014.10.032
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