{"title":"Validation of the backtesting process under the targeted review of internal models: practical recommendations for probability of default models","authors":"Lukasz Prorokowski","doi":"10.21314/JRMV.2019.203","DOIUrl":null,"url":null,"abstract":"This paper provides practical recommendations for the validation of the backtesting process under the targeted review of internal models (TRIM). It advises on the introductory steps for validating the backtesting process and reviews the available statistical tests for calibration, discrimination and stability backtesting. The TRIM regulatory exercise is an international supervisory initiative that inspects the internal models and related internal risk and governance policies of eurozone banks that are permitted to use the advanced internal risk-based (AIRB) approach. Under the TRIM guidelines, the designated banks should have specific policies and internal guidelines for the validation of the backtesting process. Further, the affected banks are required to validate the entire backtesting process. Addressing these needs, this paper serves as a basis for producing such policies and utilizing appropriate statistical tools for validating the backtesting process. The paper focusses on probability of default models. To date, no academic study has discussed the validation of the backtesting process with reference to the TRIM rules.","PeriodicalId":43447,"journal":{"name":"Journal of Risk Model Validation","volume":" ","pages":""},"PeriodicalIF":0.4000,"publicationDate":"2019-05-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"1","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Risk Model Validation","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.21314/JRMV.2019.203","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 1
Abstract
This paper provides practical recommendations for the validation of the backtesting process under the targeted review of internal models (TRIM). It advises on the introductory steps for validating the backtesting process and reviews the available statistical tests for calibration, discrimination and stability backtesting. The TRIM regulatory exercise is an international supervisory initiative that inspects the internal models and related internal risk and governance policies of eurozone banks that are permitted to use the advanced internal risk-based (AIRB) approach. Under the TRIM guidelines, the designated banks should have specific policies and internal guidelines for the validation of the backtesting process. Further, the affected banks are required to validate the entire backtesting process. Addressing these needs, this paper serves as a basis for producing such policies and utilizing appropriate statistical tools for validating the backtesting process. The paper focusses on probability of default models. To date, no academic study has discussed the validation of the backtesting process with reference to the TRIM rules.
期刊介绍:
As monetary institutions rely greatly on economic and financial models for a wide array of applications, model validation has become progressively inventive within the field of risk. The Journal of Risk Model Validation focuses on the implementation and validation of risk models, and aims to provide a greater understanding of key issues including the empirical evaluation of existing models, pitfalls in model validation and the development of new methods. We also publish papers on back-testing. Our main field of application is in credit risk modelling but we are happy to consider any issues of risk model validation for any financial asset class. The Journal of Risk Model Validation considers submissions in the form of research papers on topics including, but not limited to: Empirical model evaluation studies Backtesting studies Stress-testing studies New methods of model validation/backtesting/stress-testing Best practices in model development, deployment, production and maintenance Pitfalls in model validation techniques (all types of risk, forecasting, pricing and rating)