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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A trading firm's AI surveillance model was trained on two calm years of order-book data. During a sudden volatility spike, alert patterns change sharply and the false-negative rate rises. Which risk is most directly illustrated, and what is the most appropriate response?

This illustrates drift: relationships learned in calm markets stop holding under stress, so detection worsens. The right response is ongoing performance monitoring, recalibration or retraining including stressed data, and a fallback control. Removing stressed observations would make the model more fragile.

  1. AData leakage; remove all features from the model
  2. BConcept or data drift; monitor performance against benchmarks, recalibrate or retrain, and use a fallback controlCorrect
  3. COverfitting to the test set; reduce the test data size
  4. DSurvivorship bias; delete the stressed observations from future training

Explanation

A shift in the data-generating process in stress means relationships learned in calm markets no longer hold, which is drift. Ongoing monitoring, recalibration or retraining and a fallback control are suitable. Deleting stressed data would worsen the problem.

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