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Creating and validating risk models [40]

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Bullet points include: Short-cutting the future by referring merely to the past introduces look-back bias How this works out in practice depends on how the back-testing is carried out In-sample testing Might back-test by applying the same model (and parameters) to the entire past, having estimated the model using the same aggregate past data Poor fit largely indicates an inept risk modeller! So we can’t conclude much from a good ‘in-sample’ fit

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