The Riskiness of Risk Models
14 Pages Posted: 12 May 2011
Date Written: May 1, 2011
Abstract
We provide an economic valuation of the riskiness of risk models. We estimate the impact of model risks (estimation and specification) on VaR estimates. We find that integrating the model risk into the VaR computations implies a substantial correction, of order of 20-40% of VaR levels in realistic simulations. We also propose and illustrate a practical methodology, which relies on a backtesting framework, for integrating the global model risk into VaR estimates.
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