Measuring model risk

Model risk as part of the operational risk is a serious problem for financial institutions.As the pricing of derivatives as well as the computation of the marketor credit risk of an institution depend on statistical models the application of awrong model can lead to a serious over- or underestimation of the institution’srisk. Because the underlying data generating process is unknown in practice evaluatingthe model risk is a challenge. So far, definitions of model risk are eitherapplication-oriented including risk induced by the statistician rather than by thestatistical model or research-oriented and too abstract to be used in practice.[...]