Lesson plan

Model risk

In finance, model risk is the risk of loss resulting from using insufficiently accurate models to make decisions, originally and frequently in the context of valuing financial securities. Here, Rebonato (2002) defines model risk as "the risk of occurrence of a significant difference between the mark-to-model value of a complex and/or illiquid instrument, and the price at which the same instrument is revealed to have traded in the market". However, model risk is increasingly relevant in contexts other than financial securities valuation, including assigning consumer credit scores, real-time prediction of fraudulent credit card transactions, and computing the probability of an air flight passenger being a terrorist. In fact, Burke regards failure to use a model (instead over-relying on expert judgment) as a type of model risk.

Back to article

Article summary

In finance, model risk is the risk of loss resulting from using insufficiently accurate models to make decisions, originally and frequently in the context of valuing financial securities. Here, Rebonato (2002) defines model risk as "the risk of occurrence of a significant difference between the mark-to-model value of a complex and/or illiquid instrument, and the price at which the same instrument is revealed to have traded in the market". However, model risk is increasingly relevant in contexts other than financial securities valuation, including assigning consumer credit scores, real-time prediction of fraudulent credit card transactions, and computing the probability of an air flight passenger being a terrorist. In fact, Burke regards failure to use a model (instead over-relying on expert judgment) as a type of model risk.

Key claims

  1. date of establishment: 2006 — source: Wikipedia · confidence 0.95

Discussion questions

  1. Summarise the article in your own words. Which single claim would you verify first, and why?
  2. The record states that the date of establishment is "2006". What evidence would count against this claim?
  3. Which claim in this article is most likely to be revised as the sources update? How would you check its current status?
  4. If two sources disagreed about one of these facts, what would you need in order to trust one over the other?

Bibliography

  1. Wikipedia https://en.wikipedia.org/w/index.php?oldid=1368647371

Key claims and bibliography are generated from the same tracked claims and sources as the article page.