Technical paper/Model risk
Model risk in the Fundamental Review of the Trading Book: the case of the Default Risk Charge
This paper assesses the model risk associated with the copula choice for the calculation of the Default Risk Charge (DRC) measure.
Governance and organizational requirements for effective model risk management
This paper expands on the foundation of model risk analytics to address the governance, organizational and human behavior challenges associated with enterprise MRM.
A Darwinian view on internal models
In this paper, Paul Embrechts reviews discussions on regulation within banking (Basel III and IV) and insurance (Solvency II and Swiss Solvency Test (SST)) from a historical, personal and academic point of view.
A practical maturity assessment method for model risk management in banks
This paper proposes a qualitative method to assess the maturity of model risk management practices within banks.
Asset price bubbles and the quantification of credit risk capital with sensitivity analysis, empirical implementation and an application to stress testing
This paper presents an analysis of the impact of asset price bubbles on standard credit risk measures.
The role of model risk in extreme value theory for capital adequacy
This paper studies the impact of model risk on EVT methods when determining the value-at-risk and expected shortfall.
Liquidity stress testing: a model for a portfolio of credit lines
This paper demonstrates how cash outflows due to credit lines can be modeled in a liquidity stress test.
Stress testing and model validation: application of the Bayesian approach to a credit risk portfolio
The authors of this paper develop a Bayesian-based credit risk stress-testing methodology.
The impact of model risk on capital reserves: a quantitative analysis
This paper analyzes and quantifies the idea of model risk in the environment of internal model building.
Anatomy of a model: Valuation of physical assets
Quant ideas paper dissects layers of valuation models for physical assets
Hedge backtesting for model validation
Derivatives pricing and expected exposure models must be backtested as a basic regulatory requirement. But what does this mean exactly, and how can it be used to reserve against model risk? Lee Jackson introduces a general backtesting framework for…
Portfolio optimisation via replication
Filippo Della Casa and Michele Gaffo propose a new framework to run portfolio optimisation for life insurance business, by exporting the replicating portfolio technique from risk management to investment management. In particular, they develop a new risk…
Hedge backtesting for model validation
Hedge backtesting for model validation
Copulas and credit models
Copulas and credit models
Non-linear mixture of asset return models
Non-linear mixture of asset return models
Bayesian lessons for payout structuring
Bayesian lessons for payout structuring
Validating interest rate models under Solvency II
With Solvency II fast approaching, obtaining approval for your internal model is increasingly important. A key part of this process will be to demonstrate the ability of the model’s scenario generation to describe the evolution of interest rates…
Breaking down the model
Brett Humphreys and Andy Dunn outline a method to help energy companies minimise potential model risk and thereby avoid costly errors in valuing deals.