Quantitative Finance > Mathematical Finance
[Submitted on 2 Mar 2019]
Title:Non-Parametric Robust Model Risk Measurement with Path-Dependent Loss Functions
View PDFAbstract:Understanding and measuring model risk is important to financial practitioners. However, there lacks a non-parametric approach to model risk quantification in a dynamic setting and with path-dependent losses. We propose a complete theory generalizing the relative-entropic approach by Glasserman and Xu to the dynamic case under any $f$-divergence. It provides an unified treatment for measuring both the worst-case risk and the $f$-divergence budget that originate from the model uncertainty of an underlying state process.
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