what is model risk 
model risk is a type of risk that occurs when a financial model is used to measure quantitative information such as a firm s market risks or value transactions and the model fails or performs inadequately and leads to adverse outcomes for the firm a model is a system quantitative method or approach that relies on assumptions and economic statistical mathematical or financial theories and techniques the model processes data inputs into a quantitative estimate type of output financial institutions and investors use models to identify the theoretical value of stock prices and to pinpoint trading opportunities while models can be useful tools in investment analysis they can also be prone to various risks that can occur from the usage of inaccurate data programming errors technical errors and misinterpretation of the model s outputs understanding model riskmodel risk is considered a subset of operational risk as model risk mostly affects the firm that creates and uses the model traders or other investors who use a given model may not completely understand its assumptions and limitations which limits the usefulness and application of the model itself in financial companies model risk can affect the outcome of financial securities valuations but it s also a factor in other industries a model can incorrectly predict the probability of an airline passenger being a terrorist or the probability or a fraudulent credit card transaction this can be due to incorrect assumptions programming or technical errors and other factors that increase the risk of a poor outcome 