Innovations in Quantitative Risk Management: TU München, by Kathrin Glau, Matthias Scherer, Rudi Zagst

By Kathrin Glau, Matthias Scherer, Rudi Zagst

Quantitative versions are omnipresent –but frequently controversially mentioned– in todays hazard administration perform. New laws, cutting edge financial items, and advances in valuation suggestions supply a continuing flow of not easy difficulties for financial engineers and probability managers alike. Designing a valid stochastic version calls for finding a cautious stability among parsimonious version assumptions, mathematical viability, and interpretability of the output. additionally, facts requisites and the end-user education are to be regarded as well.

The KPMG middle of Excellence in danger administration convention hazard administration Reloaded and this lawsuits quantity give a contribution to bridging the space among academia –providing methodological advances– and perform –having a firm knowing of the commercial stipulations during which a given version is used. mentioned fields of software diversity from asset administration, credits danger, and effort to hazard administration matters in assurance. Methodologically, dependence modeling, multiple-curve curiosity rate-models, and version threat are addressed. ultimately, regulatory advancements and attainable limits of mathematical modeling are discussed.

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12], p. 23. Cf. [2, 3]. Cf. [1], p. 203. 32 U. Gaumert and M. Kemmer • Model validation will take place at desk level and become even more stringent through backtesting and a new P&L attribution process. This will significantly improve the validation process. At the same time, it will have the effect of raising the barriers to obtaining supervisory approval of internal models. • All banks using models will also have to calculate requirements using the standardised approach. Supervisors take the view that the standardised approach can serve as a floor, or even a benchmark, for internal models (the level of the floor has not yet been announced).

46 Valuation risk arising from the existence of competing valuation models and from model calibration is addressed by the EBA standard. Deductions for market price uncertainty (Article 8 of the EBA RTS) can also be interpreted as charges for model risk, even if the EBA does not itself use the term. 8 Voluntary Commitment by Banks to a Code of “Model Ethics” A commitment could be made to refrain from aggressive or inappropriate modelling with the sole aim of minimising capital requirements. Banks voluntarily exclude portfolios, such as certain (though by no means all) securitisation portfolios, from the scope of their model if questionable results tend to be generated.

This is only possible under “risk”. The concepts of “uncertainty” and “risk” are, however, abstract, theoretical extremes, while the various situations observed in reality usually lie somewhere in between. The answer to the question of whether it is more appropriate to assume a risk situation or an uncertainty situation is determined above all by the availability of the data needed for the model estimate (such as market data or historical default data). If, in addition, the risk factors associated with the financial instruments are known and taken into account, and if the potential changes in the value of a trading 19 The most recent revision of the Basel Committee’s definition of the leverage ratio can be found in draft form in [4] and, in its final form, in [8].

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