POST-CONFERENCE WORKSHOP 3: Quantifying the risk of incremental model changes

Speakers:

Mark P. Kust, Director, Head of Trading Validation Analysis & Support Corporate Model Risk Management, WELLS FARGO BANK

Damian Abasto, Vice President, Trading Model Validation, WELLS FARGO BANK

8:30 Registration and breakfast

9:00 Background
In this session, we will introduce the topic of quantifying the risk of incremental model changes by reviewing the applicable regulatory guidance and frameworks, prior academic and practitioner works and by proposing heuristics that may be used by practitioners to augment or jump-start their own model risk management programs.

  • Regulatory Framework
  • 2000 - Model Validation
  • 2011 - Model Risk
  • Prior art
  • Derman "Model Risk" 1996
  • Morini Model Risk Book 2011
  • Rama Cont
  • Glasserman & Xu
  • Others?

10:30 Morning coffee break

11:00 A new metric - "Model01"
In this session, we will introduce a new metric, Model01, which the authors have recently proposed. We will cover the metric in detail, starting with a discussion of desirable qualitative characteristics that any such metric should possess, followed by a detailed theoretical derivation and an analysis of characteristics of the metric as measured against the methods of Cont and Glasserman and Xu, which we use as benchmarks.

  • Motivation
  • Overview of the technique
  • Deep dive (theory and derivation)

12:30 Lunch

1:30 Implementation concerns
In this session, we will discuss the implementation of Model01 in a production context. This discussion will consider necessary elements such as the firm's quant analytics library and design of an efficient Monte Carlo engine. We will also discuss issues of scalability, such as the use of proxy portfolios and high-performance computing strategies.

  • The Quant Library
  • Designing the Monte Carlo Engine (with WMC)
  • Scalability
  • Proxy Portfolios
  • High-performance computing

3:00 Afternoon coffee break

3:30 A practical example
In this session, we will examine a practical example in detail, applying the method of Model01 to a broad selection of equity derivatives portfolios. As part of this example, we will discuss the use of the method in ongoing model validation and model monitoring activities, and we will demonstrate convergence of Model01 for two distinct proxy portfolio strategies.

  • Application to Ongoing Validation and Monitoring
  • Portfolio of mixed equities products
  • Proxy portfolio convergence studies
  • Conclusions, Next Steps, Areas for Further Investigation, etc.

We will conclude the workshop by summarizing our findings, highlighting challenges and by discussing areas for further investigation.

5:00 End of workshop

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