You are here

Studies in Risk Model Validation

PhD Studentship - The project will initially be following two linked themes on the topic of model validation: backtesting of risk models and the development of proxy functions

The first topic concerns the backtesting of risk models

The Value-at-Risk (VaR) risk measure is a central concept in the Basel regulatory capital framework for banks and Solvency 2 for insurers.

However, there has been a lot of interest in the alternative expected shortfall (a.k.a conditional VaR or tail VaR) risk measure, which is coherent. The Basel Committee is proposing that banks move to the expected shortfall measure for the trading book (see Fundamental Review of the Trading Book 2012). The student will review the requirements for a risk measure to be elicitable and then explore how the underlying mathematical ideas can be adapted for use in a banking setting.

Is elicitability really relevant in a regulatory setting? Is there a better alternative? Does a move to elicitable risk measures constrain firms' ability to game current backtesting regimes that are based on VaR exception counts? What is an acceptable score in a backtesting regime based on an elicitable risk measure? How do we decide whether to accept/reject a submitted set of backtesting results? How easily can the decision be defended against the complaints of the regulated?

Are there risk measures that are both coherent and elicitable and could these be used in model validation in future?

The second topic concerns the development of proxy functions

Proxy functions provide an analytical approximation to the value of a set of liabilities using current information without the need for computationally intensive simulations. Proxy functions are felt to be potentially very useful in determining SCR's under Solvency II and many other problems involving a requirement to project insurers' balance sheets. This part of the model validation project will consider a number of specific situations and seek to validate the use of specific proxy functions in these situations. A key issue will be the development of computationally efficient algorithms.

ARC research project: Studies in Risk Model Validation
ARC scholar: Hsiao-Yen Lok
University: Heriot Watt University
Period of research: January 2014 – July 2017

You might also like

Contact Details

If you have any questions or wish to discuss any aspect of research carried out through the Actuarial Research Centre (ARC), please contact the Research and Knowledge Team.

Filter or search events

Start date
E.g., 28/07/2021
End date
E.g., 28/07/2021

Events calendar

  • Asia Conference 2021 webinar series

    Online webinar series
    26 July 2021 - 30 July 2021
    Spaces available

    We have made it through 2020 but the COVID-19 crisis continues to have a significant impact on individuals, societies, businesses and the wider economy across the globe. Navigating the world post COVID-19 in an uncertain and highly unstable time brings along many uncertainties, challenges and exciting opportunities. Hence the theme of this year’s IFoA Asia Conference Webinar Series is “Risk. Adapt. Thrive.”

  • CMI Income Protection

    30 July 2021

    Spaces available

    In April 2021, the CMI Income Protection Committee published Working Paper 149, which detailed the changes to analysis methodology for the Income Protection Investigation and the impact of past data issues. This webinar will provide an overview of the changes in the analysis approach and discuss the adjustments to the IP11 claim inceptions graduations.

  • Spaces available

    Louise Pryor, IFoA President, will chair this free-to-view session, in which Alex Darsley, TPR, Actuarial Regulatory Policy, will be discussing the regulator’s Climate Change Guidance Consultation, which is seeking views on new guidance designed to help trustees meet tougher standards of governance in relation to climate change ri

  • Spaces available

    Risk Management Webinar ProgrammeInternal audit is often the Cinderella of the audit world. It’s a regulatory requirement for insurance companies to have an internal audit function, so why not make it as useful as possible?  This session will look at how to link an internal audit plan to the risk register, and how that helps audit committees and boards to spot problems and fix them.

  • Spaces available

    Climate change is one of the greatest risks facing our world today. Addressing it will require multi-faceted solutions. Through this panel session, we will explore the different levers that can be used to meet net-zero targets including climate science and data, government engagement, and mobilising green finance.