Title: The quantification and aggregation of model risk: perspectives on potential approaches

Authors: Michael Jacobs Jr.

Addresses: Accenture Consulting, 1345 Avenue of the Americas, New York, NY 10105, USA

Abstract: The field of Model Risk Management ('MRM') continues to evolve. To date, industry MRM efforts focused primarily on MRM for individual models. Now, more institutions are shifting focus towards aggregating firm-wide model risk. Regulatory guidance specifically focuses on measuring risk in individual and in aggregate. In this study, we will discuss various approaches to measuring and aggregating model risk across an institution. We also present an example of model risk quantification in the realm of stress-testing, where we compare alternative models in two different classes, Frequentist and Bayesian approaches, to modelling stressed bank losses.

Keywords: financial crisis; model risk management; SR 11-7; stress testing; Bayesian; risk measurement; modelling; stressed bank losses.

DOI: 10.1504/IJFERM.2015.074045

International Journal of Financial Engineering and Risk Management, 2015 Vol.2 No.2, pp.124 - 154

Received: 09 Jun 2015
Accepted: 18 Sep 2015
Published online: 03 Jan 2016 *

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