Top Ten Reasons Why Open Source is the Future of Risk Modeling

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Financial Risk Modelling has suffered enormous setbacks in recent years, with all major strands of modelling (market, credit, operational risk) proven to have debilitating limitations. It is impossible to imagine a modern financial system that does not make extensive use of risk quantification tools, yet rebuilding confidence that these tools are fit-for-purpose will require significant changes. These need to improve governance, transparency, quality standards and in some areas even the development of completely new strands of modelling.

Open Risk believes that the operating model of open source communities is uniquely suited for serving as the blueprint for building the next generation of risk models. Our top ten list for why this is so!

  • Reason No 10: Reduces your long-term lock-in risks. Free yourself from investments in dead-end infrastructure. Open Source brings in a continuous update model that is necessary for rebuilding risk modelling over a long horizon. Tools build around open source can always be forked and improved.
  • Reason No 9: Lowers costs to the organization. Building a quality risk modelling framework in the midst of strong cost cutting pressures is not easy. Use open source leverage to get rid of oligopolistic pricing phenomena.
  • Reason No 8: Empowers smaller organizations. The cost and complexity of risk management frameworks had deprived smaller firms from benefiting from best practice tools. Open source helps create a more level playing field.
  • Reason No 7: Unleashes the potential of in-house teams. Focus on problem solving rather than rebuilding the wheels for the n-th time. Open Source allows customizations to make the risk framework exactly fit your needs.
  • Reason No 6: Builds on modularity. Modularity is essential for creating stable systems. This is true in IT as well as risk modelling. Integrated risk management will never become a reality without the embedded modularity of an open framework
  • Reason No 5: Leverages standards. Establish quality benchmarks and raise professionalism. The concept of a risk modelling professional hardly exists today, yet goes hand in hand with the adoption of rigorous, publicly debated and documented standards, way and above the minimum requirements imposed by regulators.
  • Reason No 4: Supports improved model validation. Transparency of weaknesses. Open source risk models are not model-risk free. But they start with a massive advantage over proprietary or in-house ad-hoc solutions.
  • Reason No 3: Regains trust of stakeholders. Strong signal of change in attitude. While not the only change in attitude required, it is certainly one of the most powerful possibilities in the technical area of risk modelling.
  • Reason No 2: Teaches some new IT tricks. Reduce your disruption risk. Financial services IT and by induction also the IT infrastructure supporting risk measurement are lagging in innovation and adoption of best practices, many of which are based on open source technologies.
  • Reason No 1: It is the new world order and it is fun!.

Presented at the TopQuants 2014 Autumn meeting. Find the entire talk here.