In theory, a poor model should be quickly discovered and either eliminated or tweaked so that it delivers more accurate prices. However, for various reasons, including intellectual arrogance and in some cases a crooked desire to book fictitious profits, this does not always occur.
A recent report entitled Model validation best practices: Achieving value-added from research consultancy Celent, now part of the Oliver Wyman group, suggests the implementation of a framework that will help ensure models perform as they should and actually add, rather than subtract, value. Authors Umit Kaya and Il-Dong Kwon point out that "the upsurge in usage of models, sophistication of underlying theories, and complexity of the IT environment have firmly placed model risk on regulator and senior executive agendas. Building a model governance framework to...
