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Quantitative model validation

A US investment bank required support to validate valuation models across FX, interest rates and equity derivatives portfolios

Developing the validation methodology

Our client wanted us to provide insight into the generally accepted market practices for valuing these financial instruments and not restrict the validation to a purely academic exercise.

We discussed the valuation principles for each product type, as well as market standards and conventions, to enable the client to decide what models to use as the base case for each product type.

Regression tests were designed and implemented for each product, including drill-downs into their vanilla components, to ensure that the valuation and risk numbers could be systematically checked with multiple cross-checks.

Delivering the validation

We successfully worked with our client’s quant teams to validate and improve the modelling approach to bring the models into line with standard market conventions

We provided comprehensive documentation for the products and models, including synopses that could be directly forwarded to clients who wanted an understanding of the valuation and risk calculation procedure.

Where appropriate, model shortcomings were documented and proposals were provided to address the issues.

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