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Model risk of risk models

Danielsson, Jon and James, Kevin R. and Valenzuela, Marcela and Zer, Ilknur (2016) Model risk of risk models. Journal of Financial Stability, 23. pp. 79-91. ISSN 1572-3089

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Identification Number: 10.1016/j.jfs.2016.02.002

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 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, further frustrating the reliability of risk readings. Finally, particular conclusions on the underlying reasons for the high model risk and the implications for practitioners and policy makers are discussed.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-financ...
Additional Information: © 2016 Elsevier B.V
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G10 - General
G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
Sets: Departments > Finance
Research centres and groups > Systemic Risk Centre
Date Deposited: 05 May 2016 09:47
Last Modified: 22 Sep 2017 14:19
Projects: ES/K002309/1, UNSPECIFIED
Funders: Economic and Social Research Council, AXA Research Fund
URI: http://eprints.lse.ac.uk/id/eprint/66365

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