Independent testing of whether a model is sound, accurate and suitable for its use. It covers assumptions, data, performance and limitations.
Where you will meet it
Model validation comes up in 4 learning outcome notes across the FRM syllabus.
A few of them:
The Governance of Risk Management FRM Part I · Foundations of risk management
“Limits, escalation of breaches, independent model validation and price verification, enterprise-wide reporting and pay aligned with risk complete the picture.”
Advances in Artificial Intelligence: Implications for Capital Markets Activities FRM Part II · Current issues in financial markets
“They also need model validation and ongoing monitoring, sound data quality, explainability, human oversight, and third-party risk management with due diligence and exit plans.”
Supervisory Guidance on Model Risk Management FRM Part II · Operational risk and resilience
“Model validation is the set of activities that assess whether a model performs as intended and whether its limitations are understood.”
Range of practices and issues in economic capital frameworks FRM Part II · Operational risk and resilience
“Supervisors should also weigh the quality of model validation, data and governance, and how far the bank really uses the numbers in decisions.”
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