Abstract

http://ssrn.com/abstract=1943605
 
 

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An Economic Evaluation of the Model Risk for Risk Models


Bertrand B. Maillet


University of Orléans; LEO/CNRS

Christophe Boucher


Université Paris I Panthéon-Sorbonne - CES/CNRS

Patrick Kouontchou


University of Metz (Paul Verlaine) - CEREFIGE

October, 13 2011

Paris December 2011 Finance Meeting EUROFIDAI - AFFI

Abstract:     
The recent experience from the global financial crisis has raised serious doubts about the accuracy of standard risk measures as a tool to quantify extreme downward risks. Standard risk measures are subject to a “model risk” due to the specification and estimation uncertainty. We propose a general adjustment of the Value-at-Risk to compute risk measures robust to the model risk. The proposed procedure aims empirically adjusting the imperfect quantile estimate assessing the good quality of VaR models such as frequency exceptions, independence of violations and magnitude of violations. Based on a long sample of U.S. data, we find an inverse U-shape relation between VaR model errors and the horizon: corrections (for model errors) are higher for short-term horizons but are also increasing for long-term horizons. We also provide a fair comparison between the main risk models using the same metric that corresponds to model risk required corrections.

Number of Pages in PDF File: 43

Keywords: Value-at-Risk, Backtesting, Model Risk, Bias Correction

JEL Classification: C50, G11, G32

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Date posted: October 14, 2011  

Suggested Citation

Maillet, Bertrand B. and Boucher, Christophe and Kouontchou, Patrick, An Economic Evaluation of the Model Risk for Risk Models (October, 13 2011). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: http://ssrn.com/abstract=1943605 or http://dx.doi.org/10.2139/ssrn.1943605

Contact Information

Bertrand B. Maillet (Contact Author)
University of Orléans ( email )
Rue de Blois
Orléans, F-45 067
France
HOME PAGE: http://www.bertrand-maillet.net
LEO/CNRS ( email )
Rue de Blois
Orléans, F-45 067
France
HOME PAGE: http://www.bertrand-maillet.net
Christophe Boucher
University of Paris 1 Pantheon-Sorbonne - CES/CNRS ( email )
106 bv de l'Hôpital
Paris, 75013
France
Patrick Kouontchou
University of Metz (Paul Verlaine) - CEREFIGE ( email )
UFR DEA, Ile du Saulcy
Metz, 57012
France
033665778342 (Phone)
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