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FRM Part II · FRM Exam Part II · The Financial Stability Implications of Artificial Intelligence

A risk officer at an asset manager notes that many market participants now rely on the same few third-party AI models and similar training data. According to the FSB's analysis of AI and financial stability, which market-level outcome is most directly associated with this concentration?

Widespread reliance on the same AI models, data and providers tends to increase herding and correlated positioning. Similar signals lead firms to trade the same way at the same time, which can amplify market stress and raise systemic vulnerability rather than diversifying risk.

  1. ALower correlations across trading strategies, because models diversify decisions
  2. BIncreased herding and correlated positioning, which can amplify market stressCorrect
  3. CReduced procyclicality, because models respond faster to new information
  4. DElimination of tail risk, because models process more data than humans

Explanation

When firms use common models, data and providers, their trading signals and risk assessments become similar. This produces correlated positions and herding that can amplify shocks. The option about lower correlations reverses the effect, since shared models reduce rather than raise strategy diversity.

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