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Definition of Model risk - Finance dictionary
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Model risk (See Chapter 24 of the Vernimmen)
Model Risk arises when the model's assumptions do not exactly correspond to reality. For example, the Black & Scholes model is based on log-normal distribution. Such assumption eliminates the possibility of a Market crash almost completely, making it necessary to adjust the model for the probabilities of extreme Market developments.
Model risk (See Chapter 24 of the Vernimmen)
Model Risk arises when the model's assumptions do not exactly correspond to reality. For example, the Black & Scholes model is based on log-normal distribution. Such assumption eliminates the possibility of a Market crash almost completely, making it necessary to adjust the model for the probabilities of extreme Market developments.
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Definitions of terms begining
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Model risk (See Chapter 24 of the Vernimmen)
Model Risk arises when the model's assumptions do not exactly correspond to reality. For example, the Black & Scholes model is based on log-normal distribution. Such assumption eliminates the possibility of a Market crash almost completely, making it necessary to adjust the model for the probabilities of extreme Market developments.
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