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Register a new userDisentangling Price, Risk and Model Risk: V&R measures
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Marco Maggis Doctor
Publication date
2017
fields
Financial
and research's language is
English
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We propose a method to assess the intrinsic risk carried by a financial position $X$ when the agent faces uncertainty about the pricing rule assigning its present value. Our approach is inspired by a new interpretation of the quasiconvex duality in a Knightian setting, where a family of probability measures replaces the single reference probability and is then applied to value financial positions. Diametrically, our construction of Value&Risk measures is based on the selection of a basket of claims to test the reliability of models. We compare a random payoff $X$ with a given class of derivatives written on $X$ , and use these derivatives to textquotedblleft testtextquotedblright the pricing measures. We further introduce and study a general class of Value&Risk measures $% R(p,X,mathbb{P})$ that describes the additional capital that is required to make $X$ acceptable under a probability $mathbb{P}$ and given the initial price $p$ paid to acquire $X$.
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