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

An analyst is explaining to a risk committee why AI adoption could amplify market correlations and stress. Which channel is most consistent with the FSB's analysis?

Widespread use of similar AI models, data and providers can cause herding and correlated positioning, which amplifies market shocks and procyclicality. Diverse offsetting models would dampen stress, and AI does not remove operational risk or reduce data use.

  1. ADiverse proprietary models producing offsetting trades during stress
  2. BWidespread use of similar AI models and data could lead to herding and correlated positions, amplifying market shocksCorrect
  3. CLower use of data reducing the speed of price discovery
  4. DAI eliminating operational risk in trading firms

Explanation

The FSB notes that common models, data and providers can drive uniform views and correlated trading, increasing procyclicality and market stress. Diverse offsetting models would reduce, not amplify, correlation. AI does not eliminate operational risk, and AI typically increases data use.

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