BFS 2002 

Poster Presentation 
Jeroen Kerkhof, Bertrand Melenberg, Hans Schumacher
In this paper we propose a general framework for quantification of model risk. This framework allows one to allocate regulatory capital to positions in a given market depending on the extent to which this market can be reliably modeled. Our approach is based on computing worstcase risk measures over sets of models that are in some appropriate sense close to a nominal model. The method is general in the sense that it can be applied with any of the usual risk measures such as ValueatRisk and Tail Conditional Expectation. Inasfar as risk measures can also be used as pricing tools or as determinants of margin requirements, the paper provides a quantification of model risk in these settings as well. We present applications both to stock portfolios and to derivative products: we find that, for usual specifications, misspecification risk is much more important than estimation risk.
http://cwis.kub.nl/~few5/center/phd_stud/kerkhof/MrRc.pdf