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Assessing Financial Model Risk

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  • Pauline Barrieu
  • Giacomo Scandolo

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

  • Pauline Barrieu & Giacomo Scandolo, 2013. "Assessing Financial Model Risk," Papers 1307.0684, arXiv.org, revised Jul 2013.
    • Handle: RePEc:arx:papers:1307.0684
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