Model risk

A ll models are wrong but some are useful

There is often a significance difference in risk forecasts for the same asset and date, just depending on the estimation method. That is a manifestation of model risk, the risk of suffering bad outcomes when making decisions with models.

There are many ways to define and measure model risk. One is the risk ratio method in Model risk of risk models.

This is based on defining model risk as the ratio of the highest to the lowest risk forecast. If all models agree, the model risk is one.

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