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14 - Statistical Decisioning Tools for Model Risk Management

Published online by Cambridge University Press:  02 March 2023

By
Bhojnarine R. Rambharat
Edited by
David Lynch ,
Iftekhar Hasan  and
Akhtar Siddique
David Lynch
Affiliation:
Federal Reserve Board of Governors
Iftekhar Hasan
Affiliation:
Fordham University Graduate Schools of Business
Akhtar Siddique
Affiliation:
Office of the Comptroller of the Currency
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Summary

Supervisory applications are rife with examples where models are used and consequently require appropriate validation. This chapter compares and contrasts the notions of model risk and model uncertainty as they relate to both model choice and validation strategy. The chapter uses a decision-theoretic architecture (cf. ch. 7 of Optimal Statistical Decisions by M. DeGroot, 1970) and advances a thesis of how risk model validation can be actuated via utility optimization. An empirical exercise where the aforementioned themes conclude the chapter using a Home Mortgage Disclosure Act (HMDA) data set.

Keywords

Model risk vs uncertaintyStatistical decisioning Economic capital
Type
Chapter
Information
Validation of Risk Management Models for Financial Institutions
Theory and Practice
 , pp. 359 - 378
Publisher: Cambridge University Press
Print publication year: 2023

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References

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