Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/230747
Authors: 
Detering, Nils
Packham, Natalie
Year of Publication: 
2018
Series/Report no.: 
IRTG 1792 Discussion Paper No. 2018-036
Abstract: 
Paralleling regulatory developments, we devise value-at-risk and expected shortfall type risk measures for the potential losses arising from using misspecied models when pricing and hedging contingent claims. Essentially, losses from model risk correspond to losses realized on a perfectly hedged position. Model uncertainty is expressed by a set of pricing models, relative to which potential losses are determined. Using market data, a unied loss distribution is attained by weighing models according to a relative likelihood criterion. Examples demonstrate the magnitude of model risk and corresponding capital buers necessary to suciently protect trading book positions against unexpected losses from model risk.
Subjects: 
Model risk
parameter uncertainty
hedge error
value-at-risk
expected shortfall
JEL: 
G32
G13
Document Type: 
Working Paper

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