Measures of model risk for continuous-time finance models

Lazar, E. ORCID: https://orcid.org/0000-0002-8761-0754, Qi, S. and Tunaru, R. (2024) Measures of model risk for continuous-time finance models. Journal of Financial Econometrics. ISSN 1479-8417 doi: 10.1093/jjfinec/nbae001

Abstract/Summary

Measuring model risk is required by regulators on financial and insurance markets. We separate model risk into parameter estimation risk and model specification risk, and we propose expected shortfall type model risk measures applied to L´evy jump, affine jump-diffusion and multifactor models. We investigate the impact of parameter estimation risk and model specification risk on the models’ ability to capture the joint dynamics of stock and option prices. Using Markov chain Monte Carlo techniques, we implement two methodologies to estimate parameters under the risk-neutral probability measure and the real-world probability measure jointly.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/114615
Item Type	Article
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Oxford University Press
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