IDEAS home Printed from https://ideas.repec.org/p/mod/wcefin/07102.html
   My bibliography  Save this paper

Model risk and techniques for controlling market parameters. The experience in Banco Popolare

Author

Listed:
  • Michele Bonollo

    ()

  • Davide Morandi

    ()

  • Chiara Pederzoli

    ()

  • Costanza Torricelli

    ()

Abstract

The increasing use of internal market models for market risk assessment and management promotes, in compliance with Basel II, better risk management practices but introduces at the same time the so called model risk. In the light of the many open issues connected to market risk, the aim of this paper is twofold. First, it offers a formal analysis of model risk which is aimed to clarify quantification issues and to illustrate the architecture of a control process for this type of risk. An important building block of such an architecture is the so called market parameters control process, which is the focus of the present paper and consists of two different phases: the definition of the data sources and the data retrieval forms, and the definition of the techniques for valuing variables (i.e. input model data) based on market data. Second, this paper proposes a market parameters control process and its implementation within an important Italian bank, namely Gruppo Banco Popolare. Specifically, by focusing on equity market risk, this paper illustrates the whole organization process needed to set up and implement the market parameters control techniques, which imply first controlling for integrity (existence, domain, homogeneity) and outliers and then performing benchmarking activities. Special emphasis is placed on the so-called second level parameters, which do not have official quotes and still are fundamental especially in valuing non linear positions (e.g. volatility). These activities are based on mathematical-statistical models, whose implementation has required the development of specific software and IT solutions and the adoption of an articulate organizational structure.

Suggested Citation

  • Michele Bonollo & Davide Morandi & Chiara Pederzoli & Costanza Torricelli, 2007. "Model risk and techniques for controlling market parameters. The experience in Banco Popolare," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 07102, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
  • Handle: RePEc:mod:wcefin:07102
    as

    Download full text from publisher

    File URL: http://www.cefin.unimore.it/sites/default/files/mktpar.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Carlo Alberto Magni, 2009. "Accounting and economic measures:An integrated theory of capital budgeting," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 09121, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    2. Lyra, M. & Paha, J. & Paterlini, S. & Winker, P., 2010. "Optimization heuristics for determining internal rating grading scales," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2693-2706, November.
    3. S. Muzzioli, 2010. "Option-based forecasts of volatility: an empirical study in the DAX-index options market," The European Journal of Finance, Taylor & Francis Journals, vol. 16(6), pages 561-586.
    4. Costanza Torricelli, 2009. "Models For Household Portfolios And Life-Cycle Allocations In The Presence Of Labour Income And Longevity Risk," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 09033, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    5. Riccardo Ferretti & Francesco Pattarin, 2008. "Is public information really public? The role of newspapers," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 08013, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    6. Carlo Alberto Magni, 2010. "Average internal rate of return and investment decisions: A new perspective," PROYECCIONES FINANCIERAS Y VALORACION 006653, MASTER CONSULTORES.
    7. Simona Castellani & Chiara Pederzoli & Costanza Torricelli, 2008. "Indebtedness, macroeconomic conditions and banks’ loan losses: evidence from Italy," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 08014, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    8. Giuseppe Marotta, 2008. "Lending interest rate pass-through in the euro area. A data-driven tale," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 08101, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    9. Elisabetta Gualandri & Andrea Landi & Valeria Venturelli, 2009. "Financial crisis and new dimensions of liquidity risk: rethinking prudential regulation and supervision," BANCARIA, Bancaria Editrice, vol. 7, pages 24-42, July.
    10. Brunetti Marianna, 2007. "Population Ageing, Household Portfolios and Financial Asset Returns: a Survey of the Literature," Politica economica, SocietĂ  editrice il Mulino, issue 2, pages 171-208.
    11. Davide Ferrari & Sandra Paterlini, 2007. "The Maximum Lq-Likelihood Method: an Application to Extreme Quantile Estimation in Finance," Department of Economics 555, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    12. repec:col:000162:006653 is not listed on IDEAS
    13. repec:col:000162:005983 is not listed on IDEAS
    14. Thiemo Krink & Sandra Paterlini, 2008. "Differential Evolution for Multiobjective Portfolio Optimization," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 08012, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    15. Thiemo Krink & Stefan Mittnik & Sandra Paterlini, 2009. "Differential evolution and combinatorial search for constrained index-tracking," Annals of Operations Research, Springer, vol. 172(1), pages 153-176, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    model risk; market parameters; control process;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:mod:wcefin:07102. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Giuseppe Marotta). General contact details of provider: http://edirc.repec.org/data/demodit.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.