A Look at Model Uncertainty in the Evaluation of Commodity Contingent Claims: A Practitioner's Guide

• Main Author: Lukovich, Jovan
• Other Authors: Kwon, Roy H.
• Language: en_ca
• Published: 2013
• Subjects: uncertainty; commodity; 0546; 0796
• Online Access: http://hdl.handle.net/1807/35640

Model uncertainty in financial markets is prevalent by the very nature of how models are constructed and used by financial practitioners. As such, a proper characterization of model uncertainty should be paramount in the eyes of every practitioner, and furthermore, a proper framework for implementing such a characterization towards financial activities should be implicit. While model uncertainty is acknowledged by practitioners, a cohesive and robust framework for determining a model uncertainty risk measure that is broadly accepted by practitioners is missing. We acknowledge this deficiency and provide a practitioner's guide for evaluating a modern characterization of model uncertainty, specifically that of Li and Kwon, as applied to a subset of derivative related calculations, with the goal of promoting its implementation by practitioners. We promote its implementation by demonstrating the utility and flexibility of such a characterization relative to another modern model uncertainty risk measure, specifically that of Cont.