Financial Risk Manager Part 1
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A newly hired model risk analyst at a bank is validating a model that was recently developed for use in stress tests conducted by the bank. The analyst first consults a senior colleague regarding best practices for validating stress testing models. Which of the following statements would the analyst's colleague be correct to make?
A
Stress test models are typically back-tested against the bank's historical data to ensure that the model is specified correctly.
B
Each stress test should use a single model so that the relationship between the scenario variables and the output is clear and unambiguous.
C
Models should produce a range of values for the bank's loss in a stress scenario, rather than a point estimate.
D
Relationships between variables in a model used for stress testing should typically be represented using the averages of their correlations over one full economic cycle.