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Stress Testing and Back Testing [25]

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Bullet points include: Risk measurement should primarily be about the future, not the past. Incorporate implied volatility or other contemporaneous data in formulation? ‘Fully’ market consistent risk measurement focuses on the market prices of risk exposures and will use market-implied data where possible. Even when not believed to provide a good guide to future ‘real world’ outcomes. Complicates back testing more difficult. Model no longer aiming to estimate ‘real world’ probabilities of future occurrence. Also sensitive to changes in market risk premiums

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