This paper introduces a new model risk measure based on hedging strategies to estimate model risk and provision calculation under uncertainty of volatility . This measure allows comparing different products and models (pricing hypothesis) under a homogeneous framework and conclude which one is the best. The model risk measure is defined in terms of the expected value and standard deviation of the loss given by the hedging strategy at a given time horizon . It has been assumed that the market volatility surface is driven by Heston 's dynamics calibrated to market for a given time horizon  . The method is applied to estimate and compare model risk under volga-vanna and Black-Scholes models for double-no-touch options and a porfolio of forward fader options.
This paper introduces a relative model risk measure of a product priced with a given model, with respect to another reference model for which the market is assumed to be driven . This measure allows comparing products valued with different models (pricing hypothesis) under a homogeneous framework which allows concluding which model is the closest to the reference. The relative model risk measure is defined as the expected shortfall of the hedging strategy at a given time horizon for a chosen significance level. The reference model has been chosen to be Heston calibrated to market for a given time horizon (this reference model should be chosen to be a market proxy) . The method is applied to estimate and compare this relative model risk measure under volga-vanna and Black-Scholes models for double-no-touch options and a portfolio of forward fader options.
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