CISI Risk - Chapter 8 Flashcards
Three limiting assumptions regarding models?
The shape of any distribution used by the model
The relationship between the past and future
The state of the business environment at the point the model was deigned
Limiting assumptions - What does the shape of an underlying distribution mean?
If the model was designed for normal distribution, it will be unsuitable for normally distributed
Limiting assumptions - What does the relationship between past and future mean?
Many models assume that the future will be similar to the past
Limiting assumptions - What does the state of business environment mean?
The environment will have changed since the model was developed, depreciating their useful ness and accuracy overtime
What is the risk with confidence levels used in VAR?
It does not account for whats outside of the confidence level
Why is stress testing important to VAR?
Understanding extreme outcomes in which the confidence level does NOT capture
The shorter the time lag in the model the what?
Easier to gauge the models accuracy
Main limitation of modelling with AI
They can be biased, leading to inaccurate decisions & predictions
2 other limitations of modelling with AI?
Complex and difficult to interpret
Expensive to develop
What is Operational Risk Scenario Modelling
Calculation of sufficient capital to guard against unexpected operational risk losses.
What team members are risk workshops usually held with>
Senior risk and business personnel.
What two metrics are used to calculate Credit Risk VAR
Standard Deviation and Credit Migration Probabilities
What three things does the Workshop capture?
The frequency
The typical loss
The severity of the loss
How are Operational Risk Loss Events distributed
Not normally, they have fat tails and often simulated with Lognormal distribution
What is Market VAR?
Max loss a firm can make with a specific confidence over a specific time period