Periodic Validation

From Open Risk Manual

Definition

Periodic Validation is the regular process whereby model performance is evaluated for a model that has not been changed. (Also: Revalidation, Repeat Validation)

Context

Primary objectives of revalidation is to guard against Model Decay which may be induced by a number of internal or external environment changes.

Such changes can be:

  • policy changes, e.g., different origination standards, product parameters
  • market changes, e.g., significant change in level, volatility or liquidity


Periodic validation may also be scheduled irrespective of whether any change at regular time intervals. The details of such policies would be part of the Model Governance framework.

The difference with Model Monitoring is primarily the agent performing the activity. In periodic validation one would normally have an independent unit involved.

Issues and Challenges

  • The cost or the additional work versus the materiality level of observed changes can lead to complacency