HOW DOES CONFIDENCE LEVEL AND HOLDING PERIOD AFFECT THE MODELLING?
The confidence level used in modelling represents the level at or below which the economic capital figure given by the model will be sufficient. Another way of putting this is that the economic capital required will be insufficient only above that level. For example, the 99th centile is the point at which 99 out of 100 results (on average) will be at or below that level of capital. It is often said to be 99 years out of 100 years or the ‘worst year’ of events in 100 years. It should be remembered that the worst year in 100 years could be this year or next year and not 99 years away! Clearly the higher the confidence level, the higher the amount of economic capital required.
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