MODEL
VALIDATION -
VALUATON AND
RISK
MODELS
*** Made CCAR 2015 a success for one of the World Largest Banks ***
*** Saved $30Bln in Regulatory Capital for an International Financial Institution ***
1. Comprehensive Analysis of
the pricing model implementation
- Review of
the underlying Model Dynamics
- Assessment of numerical routines and
methodologies
2. Model Benchmarking
- Independent implementation of alternative
models
- Convergence and Stress Testing
3. Automated Testing and Validation
- Payoff consistency tests for pricing
models, PDE Tests – i.e. ensure that a model satisfies a given PDE
- Calibration Round Trip tests – i.e. check
whether pricing with calibrated parameters is consistent with benchmark
instrument valuations
- Financial correctness and hedge
performance tests – i.e. check variance of the hedged portfolio
4. Standardized reporting to aid in meeting
key regulatory requirements w.r.t. mitigating the model risk