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Quantile Uncertainty and Value-at-Risk Model Risk
Company: Risk Analysis
Year Of Publication: 2012
Month Of Publication: April
Pages: 16
Download Count: 5
View Count: 1685
Comment Num: 0
Language: English
Source: article
Who Can Read: Free
Date: 5-8-2012
Publisher: Administrator
This paper develops a methodology for quantifying model risk in quantile risk estimates.
The application of quantile estimates to risk assessment has become common practice in
many disciplines, including hydrology, climate change, statistical process control, insurance
and actuarial science and the uncertainty surrounding these estimates has long been
recognized. Our work is particularly important in ¯nance, where quantile estimates (called
Value-at-Risk) have been the cornerstone of banking risk management since the mid 1980's.
A recent amendment to the Basel II Accord recommends additional market risk capital to
cover all sources of `model risk' in the estimation of these quantiles. We provide a novel
and elegant framework whereby quantile estimates are adjusted for model risk, relative to
a benchmark which represents the state of knowledge of the authority that is responsible
for model risk. A simulation experiment in which the degree of model risk is controlled
illustrates how to quantify model risk and compute the required regulatory capital add-on
for banks. An empirical example based on real data shows how the met
Alexander, Carol Sign in to follow this author
Sarabia, José Maria Sign in to follow this author
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