From the course: Introduction to Risk Management

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Model risk

Model risk

From the course: Introduction to Risk Management

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Model risk

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- [Instructor] Banks and financial institutions rely more and more than ever before on models. In fact, large complex banks have literally tens of thousands of models, all of which are recorded in their model inventory and are used to make decisions with billions of dollars. So what is a model? A model uses statistical, economical, financial, or mathematical theories, techniques, or assumptions to transform input data into outputs or results. Models can be created from various technologies, including C++, Excel spreadsheets, Matlab, Python, R, SAS, and SQL or sql. So what do banks use models for? Well, lots of things. For example, valuation and pricing models help traders determine whether an asset or security is over, or undervalued. Market and liquidity risk models help risk managers forecast what future risk exposures are likely to be. Credit and counterparty risk models help determine the likelihood that a customer or client may default in the future. Finance models help banks…

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