Quantitative Model Validation

Definition

Quantitative Model Validation is a subset of overall Model Validation activities that focuses on and is particularly relevant for statistical or other quantiative models.

Distinct types of quantitative model validation include:

• Point-in-time validation involves checking that time zero characteristics or initial conditions of the model adequately match expectations
• In-sample validation involves taking historical data and determining the extent to which the stylized facts of the data are captured by the model
• Out-of-sample validation or Backtesting involves looking at the output of a model from a point in time T and seeing how it performs at future time periods T + t. Out-of-sample validation helps to monitor the ongoing appropriateness of the model in light of what actually happens