Post-congress seminar 2
Model Risk and Model Validation
Led by Massimo Morini, head of Credit Models and Co-ordinator of Financial
Modelling Research, Financial Engineering, IMI BANK OF INTESA SAN PAOLO
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8.30 Registration and coffee
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9.00 Model Risk and Validation - Foundations
• Lessons from the past crises
• The price approach vs the value approach
• Model risk and fair value accounting
• The Regulators: new indications for model validation
• From theory to practice: a practical scheme for model risk management
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10.30 Morning break
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11.00 Using different models for model validation
- Measure the range of reasonable prices to quantify model risk
- Construct parametric families of models
- Practical example on gap risk with structural vs reduced-form models
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12.30 Lunch
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13.30 Stress-testing design and pitfalls to avoid
- Using market information to design stress-tests
- Practical example on correlation skew
- Using historical information to design stress-tests in illiquid markets.
Practical example from credit: mapping for bespoke portfolios
- Pitfalls in stress-testing. When the model breaks down. Practical example on
copulas for liquidity risk, dynamic Var, wrong-way risk
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15.00 Afternoon break
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15.30 Case Studies
• Understanding model evolution to prevent model losses. How the
interest-rate consensus model broke down when the basis spreads exploded.
Detecting when an assumption becomes invalid
• Hedging. The limits of pricing models when applied to hedging. The validation
of a real hedging strategy. Practical example: Local volatility models vs
stochastic volatility models for equity options
• Validating an approximation. Monitoring quantitatively the reliability of an
approximation. Examples from interest rate modelling: swaption volatilities in
the Libor market model and convexity adjustments
• When the problem is the payoff. The dramatic consequences of payoff
misunderstanding. Examples on index options and bilateral counterparty risk
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17.00 End of seminar
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Remind Me
