Difference between revisions of "Model Risk versus Model Validation"
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== Model Risk versus Model Validation == | == Model Risk versus Model Validation == | ||
| − | Model Risk and Model Validation are related concepts | + | [[Model Risk]] and [[Model Validation]] are related concepts encountered around the governance of various[[Risk Model | risk models]]. |
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| + | * [[Model Risk]] is a complex [[Risk Type]]. It refers to the potential for error in the development and implementation of a model and/or the application or interpretation of model results. In turn such model errors can lead to a variety of financial and / or reputational loss events. | ||
| + | * [[Model Validation]] is a [[Risk Mitigation]] strategy. It is the set of principles, practices and organizational arrangements supporting a rigorous (audited) [[Model Development]] and validation cycle. | ||
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Model Validation is necessary because of Model Risk (both conceptual and implementation issues) but does not eliminate it. Model validation is thus a [[Risk Mitigation]] activity and there is always a degree of [[Residual Risk]] | Model Validation is necessary because of Model Risk (both conceptual and implementation issues) but does not eliminate it. Model validation is thus a [[Risk Mitigation]] activity and there is always a degree of [[Residual Risk]] | ||
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[[Category:Model Risk]] | [[Category:Model Risk]] | ||
[[Category:Model Validation]] | [[Category:Model Validation]] | ||
[[Category:X versus Y]] | [[Category:X versus Y]] | ||
Latest revision as of 11:00, 15 September 2021
Model Risk versus Model Validation
Model Risk and Model Validation are related concepts encountered around the governance of various risk models.
- Model Risk is a complex Risk Type. It refers to the potential for error in the development and implementation of a model and/or the application or interpretation of model results. In turn such model errors can lead to a variety of financial and / or reputational loss events.
- Model Validation is a Risk Mitigation strategy. It is the set of principles, practices and organizational arrangements supporting a rigorous (audited) Model Development and validation cycle.
Model Validation is necessary because of Model Risk (both conceptual and implementation issues) but does not eliminate it. Model validation is thus a Risk Mitigation activity and there is always a degree of Residual Risk
