Project:Sandbox

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The initial model documentation was tendered on August 4th, 2023, and can be located on the MMR submission page, the link to which is provided as \href{xxx}{submission page}. This submission comprised an assortment of materials:

\begin{itemize}

\item A compressed file containing model data.

\item A meticulously detailed model change log noting the revisions since its last submission.

\item The model's white paper \cite{mdd} which stands as the principal model document and will frequently be referenced throughout this report.

\item An ongoing monitoring scheme, the evaluation of which is earmarked for Section 2.12.

\item Approvals from several stakeholders.

\end{itemize}

Upon reviewing these materials, the validation team found them adequate and proceeded with a preliminary examination of the model, deducing that the materials submitted were in line with expectations and warranted no immediate objections.

Upon a more granular examination of the model, a series of concerns and observations became evident. Most prominently, the model showcased a significant dependency on the VIX, a volatility index, as a key determinant for various components. This reliance is concerning because if VIX projections err, it could have significant repercussions on model results. Specifically, there are reservations about using the VIX to predict international equity volatility since the VIX is primarily designed to project the forward-looking performances of the U.S.-based S\&P market. Such a U.S.-centric tool may not grasp the intricacies of global market variations, especially during heightened market volatilities. Another recurring concern is the model's methodology of anchoring certain elements, like the Brent Oil baseline, directly to future market prices. This approach might inadvertently sideline or undervalue other pivotal factors influencing asset prices. Additionally, the model’s reliance on specific parameters, particularly within linear regressions, emerged as a potential weak point. For instance, in the AUD equation, the impact of variables like VIX should be supported by clear economic reasoning. Any coefficients suggesting counterintuitive outcomes might indicate overlooked variables or potential model inaccuracies.

There was a suite of other potential concerns noted, including: overfitting in several models, possible discrepancies during the COVID era, and the model's assumptions regarding Brent Oil and alternative energy sources. Another concern was the emphasis on North American credit spreads as a primary driver for international credit spread indices. Without regional specificities, such an approach might not capture nuanced shifts in regional markets. However, despite these outlined issues, none were deemed critically detrimental to the model's integrity. As such, after a thorough review and acquiring the necessary sign-offs from stakeholders, the validation team marked the submission as complete and commenced with the formal model validation process.

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