Risk Model

From Open Risk Manual

Definition

Risk Model denotes any quantitative / mathematical approach to producing risk assessments / estimates for the purpose of risk management.

Components

Any risk model is a fully realized artefact when the following components are in place

  • A precise model description (all mathematical / conceptual elements) that allow the reproduction of a model
  • A programming implementation (source code or other digital realization of the model
  • A production instance of the implementation that is used in actual decision making / risk management activities

Techniques

Risk models may be based on a variety of techniques from statistics and econometrics and may 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

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