Model risk: illuminating the black box

This paper presents latest thinking from the Institute and Faculty of Actuaries’ Model Risk Working Party and follows on from their Phase I work, Model Risk: Daring to Open the Black Box. This is a more practical paper and presents the contributors’ experiences of model risk gained from a wide range of financial and non-financial organisations with suggestions for good practice and proven methods to reduce model risk. After a recap of the Phase I work, examples of model risk communication are given covering communication: to the Board; to the regulator; and to external stakeholders. We present a practical framework for model risk management and quantification with examples of the key actors, processes and cultural challenge. Lessons learned are then presented from other industries that make extensive use of models and include the weather forecasting, software and aerospace industries. Finally, a series of case studies in practical model risk management and mitigation are presented from the contributors’ own experiences covering primarily financial services

Model risk – daring to open up the black box

With the increasing use of complex quantitative models in applications throughout the financial world, model risk has become a major concern. Such risk is generated by the potential inaccuracy and inappropriate use of models in business applications, which can lead to substantial financial losses and reputational damage. In this paper we deal with the management and measurement of model risk. First, a model risk framework is developed, adapting concepts such as risk appetite, monitoring, and mitigation to the particular case of model risk. The usefulness of such a framework for preventing losses associated with model risk is demonstrated through case studies. Second, we investigate the ways in which different ways of using and perceiving models within an organisation both lead to different model risks. We identify four distinct model cultures and argue that in conditions of deep model uncertainty, each of those cultures makes a valuable contribution to model risk governance. Thus the space of legitimate challenges to models is expanded, such that, in addition to a technical critique, operational and commercial concerns are also addressed. Third, we discuss through the examples of proxy modelling, longevity risk and investment advice, common methods and challenges for quantifying model risk. Difficulties arise in mapping model errors to actual financial impact. In the case of irreducible model uncertainty, it is necessary to employ a variety of measurement approaches, based on statistical inference, fitting multiple models, and stress and scenario analysis

The provenance of Borneo's enigmatic alluvial diamonds:A case study from Cempaka, SE Kalimantan

Gem-quality diamonds have been found in several alluvial deposits across central and southern Borneo. Borneo has been a known source of diamonds for centuries, but the location of their primary igneous source remains enigmatic. Many geological models have been proposed to explain their distribution, including: the diamonds were derived from a local diatreme; they were brought to the surface through ophiolite obduction or exhumation of UHP metamorphic rocks; they were transported long distances southward via major Asian river systems; or, they were transported from the Australian continent before Borneo was rifted from its northwestern margin in the Late Jurassic. To assess these models, we conducted a study of the provenance of heavy minerals from Kalimantan's Cempaka alluvial diamond deposit. This involved collecting U–Pb isotopic data, fission track and trace element geochemistry of zircon as well as major element geochemical data of spinels and morphological descriptions of zircon and diamond. The results indicate that the Cempaka diamonds were likely derived from at least two sources, one which was relatively local and/or involved little reworking, and the other more distal which records several periods of reworking. The distal diamond source is interpreted to be diamond-bearing pipes that intruded the basement of a block that: (1) rifted from northwest Australia (East Java or SW Borneo) and the diamonds were recycled into its sedimentary cover, or: (2) were emplaced elsewhere (e.g. NW Australia) and transported to a block (e.g. East Java or SW Borneo). Both of these scenarios require the diamonds to be transported with the block when it rifted from NW Australia in the Late Jurassic. The local source could be diamondiferous diatremes associated with eroded Miocene high-K alkaline intrusions north of the Barito Basin, which would indicate that the lithosphere beneath SW Borneo is thick (~ 150 km or greater). The ‘local’ diamonds could also be associated with ophiolitic rocks that are exposed in the nearby Meratus Mountains

Cognitive Performance in Centenarians and the Oldest Old: Norms from the Georgia Centenarian Study

We present normative data from a large population-based sample of centenarians for several brief, global neurocognitive tasks amenable for frail elders. Comparative data from octogenarians are included. A total of 244 centenarians and 80 octogenarians from Phase III of the Georgia Centenarian Study were administered the Mini-Mental Status Examination, Severe Impairment Battery, and Behavioral Dyscontrol Scale. Centenarians (age 98–107) were stratified into three age cohorts (98–99, 100–101, 102–107), octogenarians into two 5- year cohorts (80–84, 85–89). Highly significant differences were observed between groups on all measures, with greater variation and dispersion in performance among centenarians, as well as stronger associations between age and performance. Descriptive statistics and normative ranges (unweighted and population-weighted) are provided by age cohort. Additional statistics are provided by education level. While most previous centenarian studies have used convenience samples, ours is population-based and likely more valid for comparison in applied settings. Results suggest centenarians look different than do even the oldest age range of most normative aging datasets (e.g., 85–90). Results support using global measures of neurocognition to describe cognitive status in the oldest old, and we provide normative comparisons to do so

On the mechanisms governing gas penetration into a tokamak plasma during a massive gas injection

A new 1D radial fluid code, IMAGINE, is used to simulate the penetration of gas into a tokamak plasma during a massive gas injection (MGI). The main result is that the gas is in general strongly braked as it reaches the plasma, due to mechanisms related to charge exchange and (to a smaller extent) recombination. As a result, only a fraction of the gas penetrates into the plasma. Also, a shock wave is created in the gas which propagates away from the plasma, braking and compressing the incoming gas. Simulation results are quantitatively consistent, at least in terms of orders of magnitude, with experimental data for a D 2 MGI into a JET Ohmic plasma. Simulations of MGI into the background plasma surrounding a runaway electron beam show that if the background electron density is too high, the gas may not penetrate, suggesting a possible explanation for the recent results of Reux et al in JET (2015 Nucl. Fusion 55 093013)

Modelling of the effect of ELMs on fuel retention at the bulk W divertor of JET

Effect of ELMs on fuel retention at the bulk W target of JET ITER-Like Wall was studied with multi-scale calculations. Plasma input parameters were taken from ELMy H-mode plasma experiment. The energetic intra-ELM fuel particles get implanted and create near-surface defects up to depths of few tens of nm, which act as the main fuel trapping sites during ELMs. Clustering of implantation-induced vacancies were found to take place. The incoming flux of inter-ELM plasma particles increases the different filling levels of trapped fuel in defects. The temperature increase of the W target during the pulse increases the fuel detrapping rate. The inter-ELM fuel particle flux refills the partially emptied trapping sites and fills new sites. This leads to a competing effect on the retention and release rates of the implanted particles. At high temperatures the main retention appeared in larger vacancy clusters due to increased clustering rate