Technical paper/Model risk
Quantification of the estimation risk inherent in loss distribution approach models
In this paper, the authors contribute to the measurement of model risk by focusing on the quantification of estimation risk.
Model risk management: from epistemology to corporate governance
In this paper, the authors conduct an analysis of model risk in an attempt to understand the main issues that lead to failures and the best way to address such issues.
Model risk tiering: an exploration of industry practices and principles
This paper seeks to shed light on one critical area of such frameworks: model risk tiering, or the rating of risk inherent in the use of individual models, which can benefit a firm’s resource allocation and overall risk management capabilities.
A new approach to the quantification of model risk for practitioners
This paper's aim is twofold: to introduce a mathematical framework that is sufficiently general and sound to cover the main areas of model risk, and to illustrate how a practitioner can identify the relevant abstract concepts and put them to work.
Quantification of model risk in stress testing and scenario analysis
In this paper, the author's aim is to empirically analyze the numerical quantification of model risk, yielding exact buffers in currency amounts (for a given model uncertainty).
Procyclicality of capital and portfolio segmentation in the advanced internal ratings-based framework: an application to mortgage portfolios
This paper investigates the procyclicality of capital in the advanced internal ratings based (A-IRB) Basel approach for retail portfolios, and identifies the fundamental assumptions required for stable A-IRB risk weights over the economic cycle.
Bermudan swaption model risk analysis: a local volatility approach
This paper seeks to contribute a simple and (almost) model-free way of assessing the economic value of the Bermudan exercise right derived from a “minimal” local volatility enhanced interest rate model.
Optimal allocation of model risk appetite and validation threshold in the Solvency II framework
In this paper, the authors derive an analytical solution for sub-SCR VTs starting with a model risk appetite (MRA) that defines acceptable errors for an insurer’s total SCR.
New backtests for unconditional coverage of expected shortfall
In this paper, the authors present a new backtest for the unconditional coverage property of expected shortfall.
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…