Validating financial models

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Proper model validation and governance policies are necessary to mitigate financial model risk.

In 1998 a hedge fund, Long-Term Capital Management, blew up—in part because of the use of complex mathematical models.

If you are managing or setting up an internal validation team in a bank, this article is for you!

In a series of blog articles in the coming weeks, we will elaborate on the prevailing trends in model validation in the banking industry.

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In reality, a simple Excel spreadsheet model customized around your assumptions can save you hours and avoid a wasted expense in validating alternative vendor and marketing decisions.

In my experience, the top candidates will include the following: Pricing is always a tricky issue.

Vendor costs are subject to change, customers are fickle, competitors come out of the woodwork and the economy can take a downturn.

(S)he has to manage many conflicting constraints like managing data, conflicting or badly defined model requirements, diverging expectations, scarce resources, people, money and so on.

Modeling is the art of building something that works just fine no matter how nasty the environment or the organization is.

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