David Sprott Distinguished Lecture by Dr. Pauline Barrieu, London School of Economics and Political Science

Assessing financial model risk

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Model risk has a huge impact on any financial or insurance risk measurement procedure and its quantification is therefore a crucial step. In this talk, we introduce three quantitative measures of model risk when choosing a particular reference model within a given class: the absolute measure of model risk, the relative measure of model risk and the local measure of model risk. Each of the measures has a specific purpose and so allows for flexibility. We illustrate the various notions by studying some relevant examples, so as to emphasize the practicability and tractability of our approach.

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Pauline Barrieu is Professor of Statistics at the London School of Economics and Political Science, where she is Head of the Statistics Department and co-Director of the Centre for the Analysis of Time Series (CATS). She joined the Department of Statistics in 2002 having obtained two doctorates: a PhD in Finance with highest honours, Doctorat H.E.C., France, H.E.C. Graduate Business School, awarded in October 2002; and a PhD in Applied Mathematics with highest honours, Laboratoire de Probabilités et Modéles aléatoires, University of Paris VI, France, awarded in December 2002. She received the Prize for the best Actuarial PhD dissertation, Prix Actuariat, in 2003. ). Her research interests include model uncertainty, insurance-linked securitization, contract designing, micro-insurance, weather derivatives and environmental economics.