Journal of Risk
ISSN:
1465-1211 (print)
1755-2842 (online)
Editor-in-chief: Farid AitSahlia

How much is a model upgrade worth?
Sven Sandow, Jinggang Huang and Craig Friedman
Abstract
ABSTRACT
In order to shed light on cost–benefit trade-offs faced by financial model builders and purchasers, we construct a practical, easily implemented monetary measure of the differential performance between probabilistic models. To this end, we adopt the point of view of an investor who maximizes his expected utility under the model he believes. We explore general properties of the monetary value of a model upgrade and investigate a variety of important special cases. We develop explicit formulas that can be applied in realistic settings by practitioners, for example, to default probability models, which are of fundamental importance to banks and other participants in the multi-trillion dollar credit markets. We provide a case study in this context.
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Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
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