Company: Numerix LLC
Category: Market Risk
Published: 30 April 2014
Robust quantitative models have been an essential component of risk management and analysis for decades, but have dramatically increased in sophistication and complexity over
the last few years. Rapidly changing market dynamics and increased regulations demand robust financial models that address a broad range of evolving risks.
Recent high-profile model failures have emphasized the importance of modeling practices that employ stringent implementation, validation and review techniques to manage the hidden
risks - risks within models themselves. As a result, model risk is increasingly on every risk manager's radar.
In this white paper, we explore the evolution of model risk, including regulatory drivers and industry challenges. We also take a closer look at model risk analysis, examining model assessment, validation and review processes. We examine model risk management methodologies, using a case study example involving a large insurer. In conclusion, we outline what we believe are the four best practices for model risk management in today's financial marketplace.