Visualisation of model risk propagation

Abstract

This paper steps back from the focus on model risk in isolation and instead looks at the analytical infrastructure and operational environment in which models operate. Visualisation using analytical infrastructure diagrams provides a much quicker and more comprehensive understanding of the state of complexity of model dependencies and propagation of risk than textual documentation. Benefits of diagramming include knowledge sharing, a byproduct of identifying the true path of model risk and the environs through which it travels. Another benefit is identifying what and where are the analytical tools that mitigate or amplify the model risk downstream. Finally, the diagram provides a unique perspective to gauge whether the model-based production chain that feeds the business is unnecessarily complex or inefficient, or contains crucial gaps or redundancies.