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Stress Testing and Back Testing [5]

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Bullet points include: Increased independence of ‘risk management’ from ‘investment management’. Former seen increasingly as a second line of defence. ‘Use test’ applies to internal models across financial services industry, e.g. Basel II, Solvency II. Increased ‘industrialisation’ of risk management. Daily analyses, added focus on data, documentation, governance etc. Back testing: hope is that this will make model choice more robust. Stress testing: increasingly seen as complementary to VaR

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