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

Which risk management response is most appropriate for a firm worried that reliance on common AI vendors will increase correlated behavior and herding?

The firm should diversify model providers and methods and stress test for scenarios where many participants react to similar signals. This reduces concentration and captures correlation spikes, whereas standardizing on one vendor or assuming stable correlations would leave herding risk unmanaged.

  1. AAdopt the vendor's model for all desks to ensure consistency
  2. BDiversify model providers and approaches, and stress test for scenarios in which many participants act on similar signalsCorrect
  3. CRemove all human oversight to prevent subjective bias
  4. DAssume correlations remain at their historical average in stress

Explanation

Diversifying models and stress testing for correlated reactions addresses the concentration and herding channels directly. Standardizing on one vendor increases concentration, and assuming stable correlations ignores that they tend to rise in stress.

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