Cummins, M, Gogolin, F, Kearney, F et al. (2 more authors) (2023) Practice-relevant model validation: distributional parameter risk analysis in financial model risk management. Annals of Operations Research, 330 (1-2). pp. 431-455. ISSN 0254-5330
Abstract
An objective of model validation within organisations is to provide guidance on model selection decisions that balance the operational effectiveness and structural complexity of competing models. We consider a practice-relevant model validation scenario where a financial quantitative analysis team seeks to decide between incumbent and alternative models on the basis of parameter risk. We devise a model risk management methodology that gives a meaningful distributional assessment of parameter risk in a setting where market calibration and historical estimation procedures must be jointly applied. Such a scenario is typically driven by data constraints that preclude market calibration only. We demonstrate our proposed methodology in a natural gas storage modelling context, where model usage is necessary to support profit and loss reporting, and to inform trading and hedging strategy. We leverage our distributional parameter risk approach to devise an accessible technique to support model selection decisions.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © The Author(s) 2022. This is an open access article under the terms of the Creative Commons Attribution 4.0 International (CC BY 4.0) |
Keywords: | Distributional analysis; Model validation; Natural gas storage modelling; Parameter risk; Risk management |
Dates: |
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Institution: | The University of Leeds |
Academic Units: | The University of Leeds > Faculty of Business (Leeds) > Accounting & Finance Division (LUBS) (Leeds) |
Depositing User: | Symplectic Publications |
Date Deposited: | 05 Apr 2022 15:50 |
Last Modified: | 29 Nov 2023 12:21 |
Status: | Published |
Publisher: | Springer |
Identification Number: | 10.1007/s10479-022-04574-x |
Related URLs: | |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:185444 |