Model Assumptions

From Open Risk Manual

Definition

Model Assumptions are the large collection of explicitly stated or implicit premises, conventions, choices and other specifications on which any model is based.

Context

Model assumptions are necessary to contain and simplify model development, or even make a model feasible. Assumptions can be numerical or conceptual in nature. Proper Model Documentation is the primary mechanism for controlling the possibly adverse influence of assumptions.

Examples

  • Idealizations and simplifications of the underlying entity that is being modeled (e.g., market, counterparty)
  • Choice of distributions among competing choices
  • Choice of parameter fitting / calibration among competing choices

Issues and Challenges

  • Undocumented or even unrecognised model assumptions

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