Lessons for academic research from model risk management in financial institutions

Mahmood Alaghmandan and Olga Streltchenko

Abstract

In this paper, we discuss aspects of model risk management in financial institutions that could be adopted by academic institutions to improve the process of conducting academic research, identify and mitigate existing limitations, decrease the possibility of erroneous results and prevent fraudulent activities. We present three core principles of financial risk management and propose their application in academia: model ownership, documentation and effective challenge. We explore the concept of model ownership and the pivotal role of the model owner in financial institutions, proposing its equivalent in academia. Subsequently, we discuss the use of documentation in financial institutions and then elaborate on the need for a similar use and scope of documentation in academia. Finally, we delve into various aspects of the effective challenge in model risk management and suggest practical implementations for academia. We argue that establishing a framework rooted in these principles in academia would improve the quality of academic research and reduce errors in research projects. In some extreme cases, it would control for academic misconduct, and consequently, reduce the substantial financial costs incurred by academic institutions.