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Autoregressive Error Terms in PPNR Balance Modeling

It is easy for non-statisticians to get lost in statistical PPNR (Pre-Provision Net Revenue) modeling debates. But increasingly, executive viewpoints are needed in areas formerly delegated to specialized technicians. For example, many Treasury executives have grown frustrated with the fight over the use of autoregressive error terms (“AR terms”) to address serial correlation in PPNR balance models — in light of recent comments on the academic paper by Wilkins (2013). This Novantas Perspective lays out (“in English” or mostly so) the arguments for and against including AR terms in PPNR balance models and offers guidance on how to develop a ...

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