Model Risk

Submitted on 29th July 2015

Models are widely used in the area of financial economics, e.g. for derivative pricing, and sometimes play an indispensable role. Unlike liquid markets which have 'price' to reflect the value of the asset, some financial instruments, such as interest rate floors, caps and so on, lack of direct indicators of asset value. As a result, when analyzing these financial instruments,
people rely heavily on models to calculate the risks and decide the strategy to hedge.

Chalmers University of Technology
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Alexander Sakuth; Fengchong Wang
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