Model risk of contingent claims

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IRTG 1792 Discussion Paper ; No. 2018-036

Classification and Topics

• Classification: Wirtschaft ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Contingent Pricing; Futures Pricing; option pricing
• Subject: Model risk ; parameter uncertainty ; hedge error ; value-at-risk ; expected shortfall

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Detering, Nils ; Packham, Natalie
• Event: Veröffentlichung
• (who): Humboldt-Universität zu Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series"
• (where): Berlin
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/230747
• Last update: 10.03.2025, 11:44 AM CET