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which department in a bank should verify the validity of a model using in the bank's risk management system???and how does this department verify the model...according to what criteria???

- Where: usually, model validation is part of market risk dept.- How: I think they check if the models are implemented correctly, are consistent with their initial assumptions, verify no-arbitrage conditions (e.g. call-put symmetry...). I don’t know how useful the validation process is but it is necessary for regulatory reasons.

QuoteOriginally posted by: Koalawhich department in a bank should verify the validity of a model using in the bank's risk management system???and how does this department verify the model...according to what criteria???It should depend upon the importance of the model. Saying it belongs to the bank's risk management system says little. Does this model have a bank wide impact to P&L or results in booked number into the G/L? Then the highest validation may be needed using outside consultants or another highly technical group such as on the trading floor. Is it of intermediate importance? Then another similiar but independent group in the bank can validate. Or if minor importance, then the same group can validate as the one that wrote it. See OCC 2000-16 for some guidelines on model validation criteria. (http://www.occ.treas.gov/occ_current.htm)

Besides all the tests suggested by doubleV, typically risk departments also test whether the model is market fit. Generally bya) comparing the prices with actual deals in the market placeb) comparig the pricies to prices obtained from other models.

what is the role in the validation process for the risk management, internal auditor and the trading floor of the bank???? what are their main responsibilities????