Model risk of risk models

Danielsson, Jon, James, Kevin R., Valenzuela, Marcela and Zer, Ilknur (2014) Model risk of risk models. Systemic Risk Centre Discussion Papers (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 The Authors
Divisions:	Finance Systemic Risk Centre Financial Markets Group
Subjects:	H Social Sciences > HB Economic Theory
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
Date Deposited:	29 Aug 2014 11:28
Last Modified:	15 Sep 2023 23:32
Projects:	ES/K002309/1
Funders:	Economic and Social Research Council
URI:	http://eprints.lse.ac.uk/id/eprint/59296

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