Model Validation is the set of principles, practices and organizational arrangements supporting a rigorous (audited) model development and validation cycle.
Model Validation ensures that developed models offer good presentation of the variables, markets or risks under consideration, i.e. that models are "fit-for-purpose"
A defining characteristic of a mature model validation framework is that relevant models are critically reviewed by a qualified party with no direct dependency on the model sponsor. Such independent model validation is a key ingredient of broader Model Governance principles, which treat model development and model use as an essentially risky activity (Model Risk).
Model Validation Elements
Elements of the model validation process confirm that there is limited and controlled Model Risk through the examination of
- the Model Documentation,
- the Model Implementation,
- Model Outputs and Model Usage,