What is Model Risk? Model risk is the potential loss an institution may incur as a consequence of decisions that are principally based on the output of internal models as a result of errors in the development, implementation, or use of models. Understanding Model Risk Model risk’s become prominent and of serious concern following the…
What is Economic Forecasting? Economic forecasting is the process used in trying to predict or anticipate future economic conditions by using various economic variables and indicators. Economic forecasting is based on the statistical methods of forecasting, which use variables, their relation to each other, and their relationship to the overall economy. Understanding Economic Forecasting Economic…
What is Economic Capital? Economic capital is a risk measure that is defined in terms of capital. It is essentially the amount of capital that a financial company requires to stay solvent given the riskiness of its assets and operations. Economic capital is usually generated internally by financial companies using estimations and forecasting models. The…
What is the Economic Cycle? The economic cycle is the fluctuating state of an economy from periods of economic expansion and contraction. It is usually measured with the Gross Domestic Product (GDP) of a country or region. Other economic factors, such as employment rates, consumer spending, and interest rates, can also be used to determine the…
What is Economic Equilibrium? Economic equilibrium is a state in a market-based economy in which economic forces – such as supply and demand – are balanced. Economic variables that are in equilibrium are in their natural state assuming no impact of external influences. Understanding Economic Equilibrium Economic equilibrium is the result of opposing economic variables…
What are Economic Conditions? Economic conditions are the present state of affairs in the overall economy of a country or geographical region. The conditions evolve over time through various business and economic cycles. Economies cycle through periods of contraction or expansion – the former referring to an economy that is weakening, and the latter referring…
What is a Cash-Out Refinance? A cash-out refinance is a form of mortgage refinancing where the initial mortgage is paid off, and a new mortgage is established. The new mortgage loan is larger than the pre-existing loan amount, so the home equity is converted into a cash payout. How Refinancing Works Within real estate investing,…
What are Bonds vs Stocks? For prospective investors and many others, it is important to distinguish between bonds vs stocks. Two of the most common asset classes for investments are bonds, also known as fixed-income instruments, and stocks, also known as equities. Both types of investments have a deep history within the capital markets. To…
What is the Discount for Lack of Marketability (DLOM)? The discount for lack of marketability (DLOM) is applied to private companies when valuing them. It relates to the company not being publicly traded on a financial exchange. Publicly-traded companies are perceived to have a “market” since the shares can be bought or sold in a…
What is Discrete Distribution? A discrete distribution is a distribution of data in statistics that has discrete values. Discrete values are countable, finite, non-negative integers, such as 1, 10, 15, etc. Understanding Discrete Distributions The two types of distributions are: Discrete distributions Continuous distributions A discrete distribution, as mentioned earlier, is a distribution of values…
