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Article
MODEL RISK IN FINANCE - INVESTOR PERSPECTIVE
Krzysztof Jajuga
ABSTRACT. Model risk is a risk resulting from erratic model used in real world. The article discusses the problem of model risk in two types of theoretical models used in the applications. First of all, the sources of model risk are presented, as well as general methods to evaluate model risk are given. The first discussed type contains models used in financial markets, with two specific models, namely two-stock portfolio model and an option pricing model. This analysis was preceded by synthetic systematization of financial market models. The second discussed model is financial reporting model, containing financial statement. There are proposals to evaluate model risk in both cases, with the illustrative examples .
KEYWORDS: model risk, portfolio theory, option pricing, financial reporting, sensitivity measures .
JEL classification: C02, C58, D53, G32.