A Darwinian theory of model risk

An ex ante methodology is proposed to analyse the model risk pattern for a broad class of structures

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Claudio Albanese, Stéphane Crépey and Stefano Iabichino propose an ex ante methodology to analyse the model risk pattern for a broad class of structures whereby a dealer buys long-term convexity from investors and resells hedges for risk management purposes. As a particular case, they consider callable range accruals in the US dollar, a product that has been

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