What are the common sources of model risk identified in the chapter on risk management and compliance?

Common sources of model risk include data limitations, specification errors, implementation flaws, governance weaknesses, and interpretation errors.

Model risk can arise from various factors throughout the model lifecycle. Data limitations refer to issues like incomplete or biased data and the assumption that historical data will continue to be relevant. Specification errors occur when models simplify reality, leading to omitted variables or incorrect assumptions. Implementation flaws can result from coding errors or integration failures. Governance weaknesses involve inadequate oversight and validation processes. Lastly, interpretation errors happen when decision-makers misinterpret model outputs or extend their applicability beyond intended uses.