The quantification and aggregation of model risk: perspectives on potential approaches
by Michael Jacobs Jr.
International Journal of Financial Engineering and Risk Management (IJFERM), Vol. 2, No. 2, 2015

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.

Online publication date: Sun, 03-Jan-2016

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