Robust Risk Measurement and Model Risk

2012 ◽  
Author(s):  
Paul Glasserman ◽  
Xingbo Xu
Keyword(s):  
Risk Measurement ◽  
Model Risk

Robust risk measurement and model risk

2013 ◽  
Vol 14 (1) ◽  
pp. 29-58 ◽  
Author(s):  
Paul Glasserman ◽  
Xingbo Xu
Keyword(s):  
Risk Measurement ◽  
Model Risk

scholarly journals MEASURING MODEL RISK IN FINANCIAL RISK MANAGEMENT AND PRICING

2020 ◽  
Vol 23 (02) ◽  
pp. 2050012 ◽  
Author(s):  
VALERIANE JOKHADZE ◽  
WOLFGANG M. SCHMIDT
Keyword(s):  
Probability Distribution ◽  
Financial Risk ◽  
Reference Model ◽  
Risk Measures ◽  
Model Space ◽  
Market Risk ◽  
Risk Measurement ◽  
Model Risk ◽  
Financial Risk Management

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 introduce superposed model risk measures that quantify model risk relative to a reference model, which is the financial institution’s model of choice. Several risk measures that we propose require a probability distribution on the model space, which can be obtained from data by applying Bayesian analysis. Examples and a case study illustrate our approaches.

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