Journal
JOURNAL OF FINANCIAL STABILITY
Volume 23, Issue -, Pages 79-91Publisher
ELSEVIER SCIENCE INC
DOI: 10.1016/j.jfs.2016.02.002
Keywords
Model risk; Systemic risk; Value-at-Risk; Expected shortfall; Basel III
Categories
Funding
- Economic and Social Research Council (UK) [ES/K002309/1]
- AXA Research Fund
- Fondecyt [11140541]
- Institute Milenio [ICM IS130002]
- Economic and Social Research Council [ES/K002309/1] Funding Source: researchfish
- ESRC [ES/K002309/1] Funding Source: UKRI
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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. (C) 2016 Elsevier B.V. All rights reserved.
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