Measuring Model Risk in Financial Risk Management and Pricing

  title={Measuring Model Risk in Financial Risk Management and Pricing},
  author={Valeriane Jokhadze and Wolfgang M. Schmidt},
  journal={Risk Management eJournal},
Risk measurement and pricing of financial positions are based on modeling assumptions, which are common assumptions on the probability distribution of the position’s outcomes. We associate a model with a probability measure and investigate model risk by considering a model space. First, we incorporate model risk into market risk measures by introducing model weighted and superposed market risk measures. Second, we quantify model risk itself and propose axioms for model risk measures. We… 
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