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The Riskiness of Risk Models

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  • Christophe Boucher

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, A.A.Advisors-QCG - ABN AMRO)

  • Bertrand Maillet

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, A.A.Advisors-QCG - ABN AMRO, EIF - Europlace Institute of Finance)

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 - based on a backtesting framework - for incorporating the model risk into the VaR estimates.

Suggested Citation

  • Christophe Boucher & Bertrand Maillet, 2011. "The Riskiness of Risk Models," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00587779, HAL.
  • Handle: RePEc:hal:cesptp:halshs-00587779
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00587779
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    References listed on IDEAS

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    1. Aït-Sahalia, Yacine & Cacho-Diaz, Julio & Laeven, Roger J.A., 2015. "Modeling financial contagion using mutually exciting jump processes," Journal of Financial Economics, Elsevier, vol. 117(3), pages 585-606.
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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, August.

    More about this item

    Keywords

    Risque de modèle; estimation de quantiles; Bâle II.; Model risk; quantile estimation; VaR; Basel II validation test.;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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