RT Journal Article
SR Electronic
T1 Risk Model Validation: A Necessity
but also an Opportunity
JF The Journal of Structured Finance
FD Institutional Investor Journals
SP 50
OP 56
DO 10.3905/jsf.2012.18.2.050
VO 18
IS 2
A1 Sarah F. Davies
YR 2012
UL https://pm-research.com/content/18/2/50.abstract
AB In April 2011, the Office of the Comptroller of the Currency (OCC) expanded long-standing guidelines titled, “Supervi sory Guidance on Model Risk Management.” The OCC issued these guidelines in response to the banking industry’s increasing reliance on modeling and analytics to drive decision making. Third-party model developers are accustomed to an annual validation to ensure that the proverbial “proof is in the pudding” and the model remains predictive even amid changing environments. In this article, the author provides a road map for risk management professionals that emphasizes and leverages the OCC’s guidance while identifying opportunities for portfolio performance enhancement. The article covers critical validation strategies, including ongoing monitoring, outcome analysis, back testing, benchmarking, stress testing, sensitivity analysis, and drill down.TOPICS: Risk management, fixed income and structured finance