Quantitative Risk Model

Definition

Quantitative Risk Model denotes any quantitative (mathematical) tool that aims to produce systematic risk assessments / estimates for the purpose of Risk Management.

Components

A quantitative risk model is a fully realized artefact when - minimally - the following components / artefacts are in place

• A precise Model Specification with all mathematical / conceptual elements that allow for understanding and reproduction (implementation) of a model by competent professionals
• A programmed implementation (Model Implementation) (source code or other digital realization of the model) that realizes the concept articulated in the model specification
• A production instance of the implementation that is used in actual decision making / risk management activities

In practice there may be more components (documentation of data sources, test implementations, model families, different types of instances etc.)

Techniques

Quantitative risk models may be based on a large variety of techniques from statistics, econometrics (data science) and may further draw on aspects of financial or economic theory.

Issues and Challenges

• Over-reliance on quantitative approaches for decision making
• Model Risk is significant risk factor, in particular with more complex risk models