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Trust is good, control is better – Complex model validation

In a nutshell, financial models have become complex, even for allegedly simple products, simply to better describe the complexity of the underlying world.

As a key software provider in the derivatives space, Murex has invested heavily in the development and constant evolution of such models, focusing on robustness, performance, and accuracy.This constitutes the MACS (or Murex analytics) offering.

In line with its responsibility as a provider to a complex industry, and in order to deliver a much-needed reliability over time, Murex has mandated a separate department with the responsibility of designing and implementing its model validation policy. A direct result was the implementation of an industry-strength quality-control process.

Regulatory and internal control pressures lead Murex to go one step further and initiate a programme of fully transparent independent validation of its analytics.

This rigorous approach to validation is illustrated through the example of Tremor – the Murex foreign exchange options hybrid local stochastic volatility model. The independent validation of Tremor by widely recognised experts in the foreign exchange options world, MathFinance, was completed recently.