simulation to know at least the model risks they run".

Complexity

Complexity of a model or a financial contract may be a source of model risk, leading to incorrect identification of its risk factors. This factor was cited as a major source of model risk for mortgage backed securities portfolios during the 2007 crisis.

Illiquidity and model risk

Model risk does not only exist for complex financial contracts. Frey (2000) presents a study of how market illiquidity is a source of model risk. He writes "Understanding

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