These are normal risks associated with the measurement model. These arise due to expected imperfections in the risk measurement model like assumptions about distributions of rates not perfect or factors like leaving some parameters out of equations due to the complexity of the measurement process or human error while doing the measurement. These are risks that have not been accurately measured by a risk management system but are expected to be there. The variation in losses other than the known losses however should not happen too frequently otherwise it would be indicative of something unusual. ![]() It however does not mean that any losses other than this can occur due to flawed models or juts random nature (i.e. These are risks that have been correctly identified and properly measured. Broadly there are three classifications of the different types of risk: Blaming the risk measurement model may not entirely be the right thing in this case.Ī general classification has then been created for the risks that are being measured in the risk management process. There are cases when such occurrences might happen and they may not be due to flaws in the model but due to bad luck purely. However if losses have exceeded expectations then one cannot just say the risk measurement process is flawed each time this happens. ![]() The purpose of measuring risk is to find out what would be the most likely maximum loss in the portfolio value or investment.
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