Model risk of risk models
Jon Danielsson,
Kevin R. James,
Marcela Valenzuela and
Ilknur Zer
LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library
Abstract:
This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with and caused by market uncertainty. During calm periods, the underlying risk forecast models produce similar risk readings, hence, model risk is typically negligible. However, the disagreement between the various candidate models increases significantly during market distress, with a no obvious way to identify which method is the best. Finally, we discuss the main problems in risk forecasting for macro prudential purposes and propose an evaluation criteria for such models.
Keywords: Value-at-Risk; expected shortfall; systemic risk; model risk; CoVaR; MES; financial stability; risk management; Basel III (search for similar items in EconPapers)
JEL-codes: G10 G18 G20 G28 G38 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-04-30
New Economics Papers: this item is included in nep-for and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)
Downloads: (external link)
http://eprints.lse.ac.uk/59296/ Open access version. (application/pdf)
Related works:
Journal Article: Model risk of risk models (2016)
Working Paper: Model risk of risk models (2016)
Working Paper: Model Risk of Risk Models (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:59296
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