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Blame the models

Author

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  • 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.

Suggested Citation

  • Daníelsson, Jón, 2008. "Blame the models," Journal of Financial Stability, Elsevier, vol. 4(4), pages 321-328, December.
  • Handle: RePEc:eee:finsta:v:4:y:2008:i:4:p:321-328
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    References listed on IDEAS

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    1. Danielsson, Jon, 2002. "The emperor has no clothes: Limits to risk modelling," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1273-1296, July.
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    Cited by:

    1. Jon Danielsson & Kevin R. James & Marcela Valenzuela & Ilknur Zer, 2016. "Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(4), pages 795-812, June.
    2. Jan Bruha & Evžen Kocenda, 2017. "Financial Stability in Europe: Banking and Sovereign Risk," CESifo Working Paper Series 6453, CESifo Group Munich.
    3. repec:eee:reensy:v:125:y:2014:i:c:p:67-81 is not listed on IDEAS
    4. Michael B. Gordy & SØren Willemann, 2012. "Constant Proportion Debt Obligations: A Postmortem Analysis of Rating Models," Management Science, INFORMS, pages 476-492.
    5. 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.
    6. Michael B. Gordy & SØren Willemann, 2012. "Constant Proportion Debt Obligations: A Postmortem Analysis of Rating Models," Management Science, INFORMS, pages 476-492.
    7. Borio, Claudio & Drehmann, Mathias & Tsatsaronis, Kostas, 2014. "Stress-testing macro stress testing: Does it live up to expectations?," Journal of Financial Stability, Elsevier, pages 3-15.
    8. Borio, Claudio & Drehmann, Mathias & Tsatsaronis, Kostas, 2014. "Stress-testing macro stress testing: Does it live up to expectations?," Journal of Financial Stability, Elsevier, pages 3-15.
    9. 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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