# Measuring Model Risk in Financial Risk Management and Pricing

@article{Jokhadze2020MeasuringMR, title={Measuring Model Risk in Financial Risk Management and Pricing}, author={Valeriane Jokhadze and Wolfgang M. Schmidt}, journal={Risk Management eJournal}, year={2020} }

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…

## 10 Citations

Model Risk Measures: A Review and New Proposals on Risk Forecasting

- Economics, BusinessSSRN Electronic Journal
- 2019

In financial decisions, model risk has been recognized as an important source of uncertainty. The revision of the Basel II suggests that financial institutions quantify and manage their model risk.…

A theory for robust risk measures

- Mathematics, Business
- 2018

This paper considers the notion of probability-based risk measurement and two general approaches to generate risk measures that are robust and develops results regarding issues on the theory of risk measures, such as financial and continuity properties, dual representations, law invariance and elicitability.

Distributional Uncertainty for Spectral Risk Measures

- Economics
- 2021

Spectral risk measures, primarily introduced as an extension for expected shortfall, constitute a prominent class of risk measures that take account of the decision-makersrisk-aversion. In practice,…

The Relationship Between the Financial Performance of Banks and the Quality of Credit Scoring Models

- EconomicsRussian Journal of Money and Finance
- 2021

Model risk in credit scoring can be understood as the bank’s losses associated with a model quality deterioration. Deterioration in model quality entails an incorrect assessment of the…

M F ] 1 8 M ar 2 01 9 A theory for combinations of risk measures

- Mathematics, Business
- 2019

We study combinations of risk measures under no restrictive assumption on the set of alternatives. The main result is the representation for resulting risk measures from the properties of both…

Exploration of Financial Market Credit Scoring and Risk Management and Prediction Using Deep Learning and Bionic Algorithm

- Computer ScienceJournal of Global Information Management
- 2022

A credit scoring model is put forward based on the deep learning network, which uses RNN and BRNN to avoid the limitations of shallow models, and a financial credit risk management system using the integrated deep learning model is proposed.

Accuracies of Model Risks in Finance using Machine Learning

- Computer Science
- 2021

The aim of this work is to explore some existing machine learning models for operational risk, by comparing their accuracies, and shows that Logistic regression out performs all deep learning models considered for fraud detection.

Financial Risk and Corporate Governance

- BusinessHandbook of Research on New Challenges and Global Outlooks in Financial Risk Management
- 2022

This chapter intends to contribute to the analysis of the influence of corporate governance (CG) practices on company financial risk (FR) to understand the current state of CG and FR research.…

COST EFFICIENCY DALAM MENINGKATKAN KINERJA BANK SYARIAH DI INDONESIA

- Business
- 2019

Analisis kinerja bisnis dalam industri perbankan syariah dilakukan untuk menjamin dan mengevaluasi bahwa segala bentuk kegiatan perusahaan telah sesuai dengan koridor dan ketentuan syariah.…

Spectral Risk Measures and Uncertainty

- MathematicsSSRN Electronic Journal
- 2019

This work addresses the issue of risk assessment under different possible scenarios by adapting a robust framework to the class of spectral risk measures and proposes a Deviation-based approach to quantify uncertainty.

## References

SHOWING 1-10 OF 80 REFERENCES

MODEL UNCERTAINTY AND ITS IMPACT ON THE PRICING OF DERIVATIVE INSTRUMENTS

- Economics, Business
- 2004

Uncertainty on the choice of an option pricing model can lead to “model risk” in the valuation of portfolios of options. After discussing some properties which a quantitative measure of model…

Model Risk in Incomplete Markets with Jumps

- Economics
- 2015

We are concerned with determining the model risk of contingent claims when markets are incomplete. Contrary to existing measures of model risk, typically based on price discrepancies between models,…

Assessing Financial Model Risk

- EconomicsEur. J. Oper. Res.
- 2015

Three quantitative measures of model risk are introduced when choosing a particular reference model within a given class: the absolute measure ofmodel risk, the relative measure of modelrisk and the local measure ofModel risk.

Model risk of contingent claims

- Economics
- 2014

Paralleling regulatory developments, we devise value-at-risk and expected shortfall type risk measures for the potential losses arising from using misspecified models when pricing and hedging…

Robust risk measurement and model risk

- Economics
- 2012

Financial risk measurement relies on models of prices and other market variables, but models inevitably rely on imperfect assumptions and estimates, creating model risk. Moreover, optimization…

Market Risk and Model Risk for a Financial Institution Writing Options

- Economics
- 1999

Derivatives valuation and risk management involve heavy use of quantitative models. To develop a quantitative assessment of model risk as it affects the basic option writing strategy that might be…

A Methodology for Assessing Model Risk and its Application to the Implied Volatility Function Model

- EconomicsJournal of Financial and Quantitative Analysis
- 2002

Abstract We propose a methodology for assessing model risk and apply it to the implied volatility function (IVF) model. This is a popular model among traders for valuing exotic options. Our research…

Capturing parameter risk with convex risk measures

- Economics
- 2013

Adequately specifying the parameters of a financial or actuarial model is challenging. In case of historical estimation, uncertainty arises through the estimator’s volatility and possible bias. In…