Model validation and model risk: reaching the end of the line?

Michael Thaden () and Carsten S. Wehn
Additional contact information
Michael Thaden: International School of Management
Carsten S. Wehn: DekaBank

Journal of Banking Regulation, 2020, vol. 21, issue 4, No 5, 382-394

Abstract: Abstract In this paper, we argue that the current standard process of model validation can itself be seen as a model and that the quantification of model risk is very often built upon additional assumptions, which results into an infinite regress. Therefore, model validation in its current form does not constitute an endpoint of the critical examination of all models in use by a financial institution. We will show what this observation means for model uncertainty, validation and model selection. Finally, we make suggestions how this infinite regress could be resolved. In the light of our findings, we recommend a more qualitative judgement of remaining model uncertainties with regard to the regulatory and supervisory point of view rather than the introduction of more complexity into the model risk process.

Keywords: Model uncertainty; Model risk; Internal governance (search for similar items in EconPapers)
JEL-codes: C02 G21 G24 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1057/s41261-019-00121-0 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:jbkreg:v:21:y:2020:i:4:d:10.1057_s41261-019-00121-0

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41261/PS2

DOI: 10.1057/s41261-019-00121-0

Access Statistics for this article

Journal of Banking Regulation is currently edited by Dalvinder Singh

More articles in Journal of Banking Regulation from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().