Gourieroux, Christian and Tiomo, Andre
(2019):
*The Evaluation of Model Risk for Probability of Default and Expected Loss.*

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## Abstract

The quanti�cation of model risk is still in its infancy. This paper provides an operational quanti�cation of this risk for credit portfolio, when the objective is to approximate the average loss. The methodology is easy to implement and does not require the construction of any worst-case model. The required capital computed to cover for model risk depends on three components, that are an estimated impact of the incorrect model, an evaluated risk of inaccurate estimation of model risk and the prediction error hedge factor. The approach is illustrated by an application to a portfolio of corporate loans segmented by grades.

Item Type: | MPRA Paper |
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Original Title: | The Evaluation of Model Risk for Probability of Default and Expected Loss |

English Title: | The Evaluation of Model Risk for Probability of Default and Expected Loss |

Language: | English |

Keywords: | Model Risk, Estimation Risk, Speci�cation Risk, Expected Loss, Probability of Default, Required Capital, Prudential Regulation, Difference Estimator. 1 |

Subjects: | G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General |

Item ID: | 95795 |

Depositing User: | Christian Gourieroux |

Date Deposited: | 03 Sep 2019 11:07 |

Last Modified: | 26 Sep 2019 08:37 |

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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/95795 |