The difference between an observed value and the value a fitted model predicts. Patterns in residuals suggest the model is misspecified.
Where you will meet it
Residual comes up in 39 learning outcome notes across the FRM syllabus.
A few of them:
Exchanges and OTC Markets FRM Part I · Financial markets and products
“Unlike a CCP's margin, which is standardised and always two-way, OTC collateral leaves residual exposure from the threshold and from the margin period of risk.”
How Do Firms Manage Financial Risk? FRM Part I · Foundations of risk management
“The usual mistake is to assume transfer leaves no residual risk.”
Linear Regression FRM Part I · Quantitative analysis
“In a regression of Y on one explanatory variable X, OLS picks the intercept and slope that minimise the sum of squared residuals.”
Credit Risk FRM Part II · Credit risk measurement and management
“Each mitigant has residual risks: legal enforceability, collateral volatility and delay, and wrong-way risk when collateral is tied to the counterparty.”
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