Whitepaper - July 2019

How to Evaluate a Risk Model

Risk model providers often commonly report the average R2 value of the asset returns model. Some models, such as statistical models, will consistently have greater R2 values than others. However, strong explanatory power from a returns model does not necessarily translate into an accurate risk model. Low R2 values, for example, may simply indicate little common behavior within the market, not that the model is failing in any way. The ultimate test of a risk model lies in the testing of its risk forecast against realized values.


Qontigo Research Team