Accuracy of Risk Measurement Models Impossible to Verify for Banks and Regulators.
Risk measurement models, like Value at Risk (VaR), are used to estimate potential losses in financial portfolios. This study looked at ways to check how accurate these estimates are. The researchers found that it's hard to verify the accuracy of estimates for very rare events. This means it's tough for banks or regulators to know if a model is reporting risk correctly. This has big implications for banks trying to check their risk models and for regulators trying to verify reported risks.