How to quantify Model Risk from Parameter Uncertainty

For a quantitative analyst whose models are frequently scrutinized by Federal Reserve Bank examiners, the ability to quantify model risk is an important part of the model documentation process. Model risk is typically described as “. . . the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports.”

Model Risk quantification can be a tricky concept to grasp. ¬†But when we consider that models are nothing more than abstractions of real life situations, it’s easier to see how there are risks associated with models. Even when models perform exceptionally well in recreating said real life scenario.Read More »