Backtesting of Future Risk Factors • An Open-Source Approach to Validation Case Study

This case study outlines part of a project recently undertaken in the XVA Division of a global investment Bank. The Bank was looking to replace specific functionalities of its counterparty credit risk (CCR) engine. In this context a Proof of Concept (PoC) project was started to verify that the Open-Source Risk Engine (ORE) would be a viable choice, i.e. that with ORE business as well as regulatory requirements would be adhered to in a more robust and cost effective manner than the current solution. As part of the PoC, the client wanted to validate that ORE’s risk factor evolution framework – a key component to modelling CCR would be robust to market moves over an extended period of time.

Description

Backtesting of Future Risk Factors • An Open-Source Approach to Validation Case Study

To validate ORE’s applicability for risk factor evolution within the context of potential future exposure a thorough backtesting analysis was undertaken. This case study walks through an example of the backtesting and validation exercise, demonstrating ORE’s capabilities as a viable tool for calculating and historically backtesting risk factor evolutions.