Trading Model Uncertainty and Statistical Process Control

Abstract

This article examines the use of statistical process control (SPC) as a methodology for monitoring trading model uncertainty. Traditional quantitative risk management methods do not incorporate the inherent process control problems financial modeling. The reference adaptations apply to the a priori model design process and a posteriori model control. To build and monitor trading models, SPC can be used in conjunction with classical financial metrics to better control market risk. <b>TOPICS:</b>Statistical methods, VAR and use of alternative risk measures of trading risk, exchanges/markets/clearinghouses