Valuation risk

Categories of
Financial risk
Credit risk
Settlement risk Concentration risk Sovereign risk Default risk
Market risk
Interest rate risk Inflation risk Currency risk Equity risk Commodity risk Volatility risk Systemic risk
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Refinancing risk Deposit risk Margining risk
Investment risk
Model risk Execution risk Valuation risk
Business risk
Reputational risk Operational risk Country risk Political risk Legal risk Moral hazard
Profit risk
Non-financial risk
Stranded asset
v t e

Valuation risk is the risk that an entity suffers a loss when trading an asset or a liability due to a difference between the accounting value and the price effectively obtained in the trade.

In other words, valuation risk is the uncertainty about the difference between the value reported in the balance sheet for an asset or a liability and the price that the entity could obtain if it effectively sold the asset or transferred the liability (the so-called "exit price").

This risk is especially significant for financial assets and related marketable contracts with complex features and limited liquidity, that are valued using internally developed pricing models. Valuation errors can result for instance from missing consideration of risk factors, inaccurate modeling of risk factors, or inaccurate modeling of the sensitivity of instrument prices to risk factors. Errors are more likely when models use inputs that are unobservable or for which little information is available, and when financial instruments are illiquid so that the accuracy of pricing models cannot be verified with regular market trades.^[1]