The Riskiness of Risk Models

by Christophe M. Boucher of the ABN AMRO & Université Panthéon-Sorbonne - Paris I, and
Bertrand B. Maillet of the ABN AMRO & University of Paris-1

March 2011

Abstract: We provide an economic valuation of the riskiness of risk models by directly measuring the impact of model risks (specification and estimation risks) on VaR estimates. We find that integrating the model risk into the VaR computations implies a substantial minimum correction of the order of 10-40% of VaR levels. We also present results of a practical method - based on a backtesting framework - for incorporating the model risk into the VaR estimates.

JEL Classification: C14, C50, G11, G32.

Keywords: Model Risk, Quantile Estimation, VaR, Basel II Validation Test

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