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OIRM-4-model-risk.html
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<!doctype html>
<html lang="en">
<head>
<meta charset="utf-8">
<title>Operational and Integrated Risk Management | Chapter 4 | Model Risk</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Chapter 4</h1>
<h3>Model Risk</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Introduction</h2>
<p><em>Definition: The risk of error in our estimated risk measures due to inadequacies in our risk models</em></p>
<ul>
<li>Fundamental models - formal systems tying outputs to inputs based on various assumptions</li>
<li>Descriptive models - more intuitive, yet superficial shortcuts to fundamental models</li>
<li>Statistical models - attempt to capture the relationship between variables using a statistical best fit</li>
</ul>
</section>
<section>
<h2>Sources of Risk</h2>
<ul>
<li>Incorrect model specification</li>
<li>Incorrect model application</li>
<li>Implementation risk</li>
<li>Incorrect calibration</li>
<li>Programming problems</li>
<li>Data problems</li>
</ul>
</section>
<section>
<h2>Managing Model Risk</h2>
<ul>
<li>Be aware of model risk</li>
<li>Identify, evaluate, and check key assumptions</li>
<li>Test models against known parameters</li>
<li>Select the simplest reasonable model</li>
<li>Backtest and stress test the model</li>
<li>Estimate model risk quantitatively</li>
<li>Don't ignore small problems</li>
<li>Plot results and use non-parametric statistics</li>
<li>Re-evaluate models periodically</li>
<li>Establish an independent risk oversight (IRO) unit</li>
</ul>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
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