Ex-ante Model Validation and Back-Testing
As the famous statistician George Box said, “All models are wrong, but some of them are useful”. The goal of the validation process is not to say whether a model is right or wrong. Besides, model elaboration and validation must be regarded as an ongoing process, whose goal is to continuously improve and update the model. In this chapter, we shall focus on several aspects: the formal a priori validation process, back-testing issues and model risk assessment.