MODEL BUILDING & REVIEW

Models are used everywhere within financial markets. 

​Sometimes they are too complex and unwieldy.  At other times they are too simple to capture the true intricacies of the investment or portfolio.  They may be over-fit, incorporating too many unrelated variables, or under-fit, failing to adequately accommodate key variables.  Or, sometimes, they are just right.

At PF2, we work with our clients to make sure their models are just right.

As part of our investigation, we perform a general error check. 

 

Our examination tries to understand three things:

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1. Are the model inputs right or appropriate?

2. Does the calculation engine work as expected, incorporating the intended inputs and producing the desired outputs?

3. Are the outputs presented and understood appropriately, including with respect to model limitations and best practices?

 

We verify the reasonableness of the data used, and when applicable we seek to ensure that the models are calibrated appropriately.  We also design test cases to validate model outputs.

We perform independent model reviews in a variety of contexts, including:

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• Asset Pricing Models

• Risk Measurement Models (asset- or portfolio-level)

• Portfolio Risk-Return Models

• Economic Capital Calculations and other Optimization Models

• Credit Risk and Credit Rating Models

• Stress Testing

• Simulation Models and Waterfall Models

Model documentation is also very important. We examine the models’ documentation to learn the model purpose, concepts, and methods and to determine if the models, and the outputs produced, are consistent with the stated purpose and details of the documentation.   

Models or specifications can be delivered to us as mathematical formulae, spreadsheets, narrative Word documents, appropriate language computer code, or any combination that is beneficial to the client.