The validation of risk models : a handbook for practitioners

"Thepractice of quantitative risk management has reached unprecedented levels of refinement.The pricing, the assessment of risk as well as the computation of the capitalrequirements for highly complex transactions are performed through equally complex mathematical models, running on advanced computer systems, developedand operated by dedicated, highly qualified specialists. With thissophistication, however, come risks that are unpredictable, globallychallenging and difficult to manage. Model risk is a prime example andprecisely the kind of risk that those tasked with managing financial institutionsas well as those overseeing the soundness and stability of the financial systemshould worry about. This book starts with setting the problem of the validation of risk models withinthe context of banking governance and proposes a comprehensive methodological framework for the assessment of models against compliance, qualitative andquantitative benchmarks. It provides a comprehensive guide to the tools andtechniques required for the qualitative and quantitative validation of the keycategories of risk models, and introduces a practical methodology for themeasurement of the resulting model risk and its translation into prudentadjustments to capital requirements and other estimates"--