Model Validation – are you battle ready for what lies ahead in 2023?
Model Validation – are you battle ready for what lies ahead in 2023?
The BDO Quantitative Risk and Valuation Advisory team has recently undertaken a number of model validation engagements. We have been involved in the validation of a large variety of models, ranging from airline leasing methodologies, to internal ratings-based probability of default models and expected credit loss models.
Throughout our work we have noted that the successful model validation engagements generally depend on two main factors.
Firstly, it is important not to approach model validation as a simple “box-ticking” exercise. Regulatory standards often prescribe a minimal set of acceptable tests, but it is not necessarily the case that the minimum is also the optimum. Instead, model validation should be approached holistically and should begin by asking the right questions in terms of model development and the ultimate goal of the model being reviewed. In order to validate a model, one first needs an intimate understanding of why and how it was created.
Secondly, it is important for model validation to be approached with the right skill set. This includes not only the core mathematical and quantitative skills, but also a deep understanding of the operation of the financial industry that can only be garnered by hands-on experience at leading financial institutions. Strong coding skills in a variety of languages is also required, as model validation might also mean independently verifying the implementation of the models being reviewed.
We pride ourselves on combining strong academic quantitative and coding skills with a deep understanding of the financial industry obtained through practical experience at leading sell-side financial institutions. Are you confident that your suite of pricing and risk models are battle-ready for whatever may lie ahead in 2023? If you have any reservations in this respect, the BDO Quantitative Risk and Valuation Advisory team is ready to share their financial industry and consulting experience to ensure that your models continue to meet the challenges of turbulent financial markets in the new year.
Please do not hesitate to contact us for a no-obligation conversation about your needs and challenges.
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