Common validation techniques for risk proxies found wanting

Research finds two out of three methods for checking index prices as proxies don’t properly gauge tail risk

New research suggests common model validation techniques may paint a misleading picture of how well risk proxies track the assets they are supposed to follow under extreme circumstances.

Using index prices as proxies for individual assets is common practice in modelling price risk – for example, in determining collateral haircuts, as it makes calculations much less computationally demanding. But in research due to be published in the Journal of Risk Model Validation later this year, Lukas