A Categorization: Ten Types of Models

A Categorization: Ten Types of Models

Business models used by financial institutions can be placed in more than ten categories, of course, but here are ten prominent general types of models:

1.Statistical credit scoring models (typically for default)
2.Consumer- or borrower-response models
3.Consumer- or borrower-characteristic prediction models
4.Loss given default (LGD) and Exposure at default (EAD) models
5.Optimization tools (these are not models, per se, but mathematical algorithms that often use inputs from models)
6.Loss forecasting and simulation models and Value-at-risk (VAR) models
7.Valuation, option pricing, and risk-based pricing models
8.Profitability forecasting and enterprise-cash-flow projection models
9.Macroeconomic forecasting models
10.Financial-risk models that model complex financial instruments and interactions
Types 8, 9 and 10, for example, are often built up from multiple component models, and for this reason and others, these model categories are not mutually exclusive. Types 1 through 3, for example, can also be built from individual-level data (typical) or group-level data. No categorical type listing of models is perfect, and this listing is also not intended to be completely exhaustive.