Model risk

Model risk is the risk of error due to the misspecification of a model. Models are routinely used in the finance industry to take decisions. However, models are simplifications of a complex financial reality. Therefore, it is important to understand when and how models can go wrong.

We measure model risk by quantifying how quantities/decisions depend on the model, thanks to (VIX-constrained martingale) optimal transport techniques, and more generally allowing models to vary and measuring distances between them and the corresponding changes in their outputs.