Financial Risk Manager Part 2
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The degree to which actual distribution of PITs differs from uniform may provide information regarding the model's ability to accurately and reliably assess risk of a given portfolio, and the deviations indicate that the model is likely to be either conservatively or aggressively misspecified. Which of the following statements correctly describes the potential model misspecification?
A
A model is conservatively misspecified when the model distribution is too wide, and we often see realized Profit/Loss in the tails of the distribution.
B
A model is conservatively misspecified when the model distribution is too narrow, and the observed Profit/Loss clusters in the middle of the distribution.
C
A model is aggressively misspecified when the model distribution is too wide, and the observed Profit/Loss clusters in the middle of the distribution.
D
A model is aggressively misspecified when the model distribution is too narrow, and we often see realized Profit/Loss in the tails of the distribution.