Model refers to a quantitative method, system or approach that applies statistical, economic, financial or mathematical theories, techniques, and assumptions to process input data into quantitative estimates. A model is comprised of three major components:

• An information input component, which delivers assumptions and data to the model;
• A processing component, which transforms inputs into estimates; and
• A reporting component, which translates the estimates into useful business information.

Model also covers quantitative approaches whose inputs are partially or wholly qualitative or based on expert judgment, provided that the output is quantitative in nature. Financial risk modelling is specifically developed to measure and forecast the aggregate risk in a financial portfolio and involve the application of a host of econometric techniques such as market risk, value at risk (VaR), historical simulation (HS), or extreme value theory (EVT) in order to analyse a portfolio and make forecasts of the likely losses that would be incurred for a variety of risks. It is the most important part of pricing financial instruments and also helps the regulation of financial activities like asset management and lending. Such risks are typically grouped into credit risk, liquidity risk, market risk, and operational risk categories. Risk modelling assists portfolio managers in assessing the amount of capital reserves to maintain and guides their purchases and sales of various classes of financial assets. Formal risk modelling is required under the Basel III proposal for all the major international banking institutions by the various national depository institution regulators.