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Model Risk - From Epistemology to Management. Ipse se nihil scire id unum sciat. (Socrates' Plato)

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    One of the main concern and regulatory topic financial institutions have to deal with is the model risk. Senior managers tend to consider more and more model risk as one of the highest exposure a financial institution has (as illustrated by the latest EBA paper related to Advanced Measurement Approach (AMA) for Operational Risk Capital calculation). Though, while the concept seems relatively simple, the definition of the model risk (traditional and regulatory), the origins of this one (from dogmas to mis-use) and the way to manage it (from engineering conservatism into models to a proper governance process) are not necessarily well handled by practitioners, academics and regulators. Giving a clear definition and understanding the root cause of a model failure allows adopting the appropriate management style to deal with the potential issue that could lead to dramatic failures. In this paper we are proposing an analysis of the model risk trying to understand the main issues leading to the failure and the best way to address them

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    File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2015/15026.pdf
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    Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 15026.

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    Length: 27 pages
    Date of creation: Mar 2015
    Handle: RePEc:mse:cesdoc:15026
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    1. Dominique Guegan & Bertrand K. Hassani, 2011. "Operational risk: A Basel II++ step before Basel III," Documents de travail du Centre d'Economie de la Sorbonne 11053r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Mar 2012.
    2. Kjersti Aas & Daniel Berg, 2009. "Models for construction of multivariate dependence - a comparison study," The European Journal of Finance, Taylor & Francis Journals, vol. 15(7-8), pages 639-659.
    3. Dominique Guegan & Bertrand Hassani, 2014. "Distortion Risk Measures or the Transformation of Unimodal Distributions into Multimodal Functions," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00969242, HAL.
    4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    5. Acerbi, Carlo & Tasche, Dirk, 2002. "On the coherence of expected shortfall," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1487-1503, July.
    6. Joe, Harry, 2005. "Asymptotic efficiency of the two-stage estimation method for copula-based models," Journal of Multivariate Analysis, Elsevier, vol. 94(2), pages 401-419, June.
    7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    8. repec:hal:journl:halshs-00639484 is not listed on IDEAS
    9. repec:hal:wpaper:halshs-00722029 is not listed on IDEAS
    10. Rodriguez, Juan Carlos, 2007. "Measuring financial contagion: A Copula approach," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 401-423, June.
    11. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
    12. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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