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Journal of Banking & Finance Vol. 44 2014

Risk models-at-risk

Christophe M. Boucher1,2; Jón Daníelsson; Patrick S. Kouontchou1,2; Bertrand Maillet3,4

1 Centre Européen de Recherche en Economie Financière et Gestion des Entreprises · 2 Université de Lorraine · 3 Université d'Orléans · 4 Écologie Marine Tropicale des Océans Pacifique et Indien

Abstract

The experience from the global financial crisis has raised serious concerns about the accuracy of standard risk measures as tools for the quantification of extreme downward risks. A key reason for this is that risk measures are subject to a model risk due, e.g. to specification and estimation uncertainty. While regulators have proposed that financial institutions assess the model risk, there is no accepted approach for computing such a risk. We propose a remedy for this by a general framework for the computation of risk measures robust to model risk by empirically adjusting the imperfect risk forecasts by outcomes from backtesting frameworks, considering the desirable quality of VaR models such as the frequency, independence and magnitude of violations. We also provide a fair comparison between the main risk models using the same metric that corresponds to model risk required corrections.

DOI
10.1016/j.jbankfin.2014.03.019
Volume
44
Pages
72-92
Language
en
Sources
openalex openalex crossref bibtex:phds-export.bib

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