Quantifying model performance

Alexandre Antonov, Jan Baldeaux and Rajiv Sesodia
26 May 2020

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To assess the performance of a model, practitioners often use the so-called P&L Explain, which measures whether portfolio price movements can be explained using changes in risk factors and corresponding sensitivities. This criterion can be misleading when assessing the performance of a model. Alexandre Antonov, Jan Baldeaux and Rajiv Sesodia introduce a new metric, a backward-looking criterion, based on the same replication arguments used in no-arbitrage derivatives

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