IDEAS home Printed from https://ideas.repec.org/a/rsk/journ1/2335475.html
   My bibliography  Save this article

Backtesting counterparty risk: how good is your model?

Author

Listed:
  • Ignacio Ruiz

Abstract

ABSTRACT Backtesting counterparty credit risk (CCR) models is anything but simple. Such backtesting is becoming increasingly important in the financial industry since both the CCR capital charge and credit valuation adjustment (CVA) management have become even more central to banks. In spite of this, there are no clear guidelines from regulators on how to perform this backtesting. This is in contrast to market risk models, where the Basel Committee set a strict set of rules in 1996, which are widely followed. In this paper, we explain a quantitative methodology to backtest counterparty risk models. We expand the three-color Basel Committee scoring scheme from the market risk to the CCR framework. This framework can be applied to single or multifactor models. With this methodology, each model can be assigned a color score for each chosen time horizon. Financial institutions can then use this framework to assess the need for model enhancements and to manage model risk. We have implemented this framework in a Tier-1 financial institution; the model report it generated was sent to the regulators for internal model methods approval. The model was approved a few months later.

Suggested Citation

Handle: RePEc:rsk:journ1:2335475
as

Download full text from publisher

File URL: https://www.risk.net/system/files/import/protected/digital_assets/7630/jcr_ruiz_web.pdf
Download Restriction: no
---><---

More about this item

Statistics

Access and download statistics

Corrections

All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rsk:journ1:2335475. See general information about how to correct material in RePEc.

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

We have no bibliographic references for this item. You can help adding them by using this form .

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Paine (email available below). General contact details of provider: https://www.risk.net/journal-of-credit-risk .

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.