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Model risk of risk models

Danielsson, Jon and James, Kevin R. and Valenzuela, Marcela and Zer, Ilknur (2014) Model risk of risk models. SRC Discussion Paper, No 11. Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.systemicrisk.ac.uk/
Additional Information: © 2014 Systemic Risk Centre, The London School of Economics and Political Science
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Finance
Research centres and groups > Systemic Risk Centre
Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 29 Aug 2014 11:28
Last Modified: 05 Oct 2017 09:27
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/59296

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