Stress Testing

What is a Margin of Conservatism?

This question comes up a lot in my field of work, and unfortunately, there is no rigorous answer. Everybody seems to have a different (albeit loosely similar) definition of a margin of conservatism. However, we all need a definition, as it drives much of the model development and validation work at financial institutions. Furthermore, AIRB risk parameter estimation models require a margin of conservatism,…