Measuring the Model Risk of Contingent Claims

Detering, Nils; Packham, Natalie

doi:10.2139/ssrn.2214913

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Cited by 4 publications

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“…More recently in 2013, J.P. Morgan revealed a trading loss of more than $6.2 billions, which was indirectly caused by the underestimation of risk level by their value-at-risk (VaR) model. Model risk is also identified by the Basel Committee on Banking Supervision in the old and new Basel frameworks; see Basel Committee on Banking Supervision (2006), Basel Committee on Banking Supervision (2011), Detering and Packham (2016). Financial institutions must gauge their model risk to fulfil regulatory requirements (Kerkhof et al, 2010).…”

Section: Introductionmentioning

confidence: 99%

Parameter estimation risk in asset pricing and risk management: A Bayesian approach

Tunaru

Zheng

2017

International Review of Financial Analysis

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Section: Introductionmentioning

confidence: 99%

Parameter estimation risk in asset pricing and risk management: A Bayesian approach

Tunaru

Zheng

2017

International Review of Financial Analysis

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Model Risk in Incomplete Markets with Jumps

Detering¹,

Packham

2015

Innovations in Quantitative Risk Management

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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, we develop value-at-risk and expected shortfall measures based on realized P&L from model risk, resp. model risk and some residual market risk. This is motivated, e.g., by financial regulators' plans to introduce extra capital charges for model risk. In an incomplete market setting, we also investigate the question of hedge quality when using hedging strategies from a (deliberately) misspecified model, for example, because the misspecified model is a simplified model where hedges are easily determined. An application to energy markets demonstrates the degree of model error.

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Measuring the Model Risk of Quadratic Risk Minimizing Hedging Strategies with an Application to Energy Markets

Detering

2014

SSRN Journal

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Measuring the Model Risk of Contingent Claims

Cited by 4 publications

References 63 publications

Parameter estimation risk in asset pricing and risk management: A Bayesian approach

Parameter estimation risk in asset pricing and risk management: A Bayesian approach

Model Risk in Incomplete Markets with Jumps

Measuring the Model Risk of Quadratic Risk Minimizing Hedging Strategies with an Application to Energy Markets

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