Model Risk Management for Machine Learning

www.prmia.org© PRMIA 2020
Model Risk Management for Machine Learning Models
Sri Krishnamurthy, CFA, CAP
Founder & CEO
www.QuantUniversity.com
Thought Leadership Webinar

Presenter
Sri Krishnamurthy, CFA, CAP
Founder & CEO, QuantUniversity
• Advisory and Consultancy for Financial Analytics
• Prior experience at MathWorks, Citigroup, and Endeca and
25+ years in financial services and energy
• Columnist for the Wilmott Magazine
• Teaches Analytics in the Babson College MBA program and at
Northeastern University, Boston
• Reviewer: Journal of Asset Management

About www.QuantUniversity.com
• Boston-based Data Science, Quant
Finance and Machine Learning
training and consulting advisory
• Trained more than 5,000 students
in Quantitative methods, Data
Science and Big Data Technologies
using MATLAB, Python and R
• Building a platform for AI
and Machine Learning Enablement
in the Enterprise

Agenda
Considerations for MRM
for Machine Learning
models
Case Study
Machine Learning

Machine Learning in FinancePart 1

The world as we know has changed!

Machine Learning and AI Have Revolutionized Finance

Machine Learning & AI in Finance: A Paradigm Shift
Stochastic
Models
Factor Models Optimization
Risk Factors P/Q Quants
Derivative
pricing
Trading
Strategies
Simulations
Distribution
fitting
Real-time
analytics
Predictive
analytics
Machine
Learning
RPA NLP
Deep
Learning
Computer
Vision
Graph
Analytics
Chatbots
Sentiment
Analysis
Alternative
Data
Quant Data Scientist/ML
Engineer

Machine Learning
1. https://en.wikipedia.org/wiki/Machine_learning
Figure Source: http://www.fsb.org/wp-content/uploads/P011117.pdf
AI
• Artificial intelligence is
intelligence demonstrated by
machines, in contrast to the
natural intelligence displayed by
humans and animals1.
Definitions: Machine Learning and AI
• Machine learning is the scientific
study of algorithms and statistical
models that computer systems use
to effectively perform a specific
task without using explicit
instructions, relying on patterns
and inference instead1.
1. https://en.wikipedia.org/wiki/Machine_learning
2. Figure Source: http://www.fsb.org/wp-content/uploads/P011117.pdf

Polling Question 1
• Question: Have you deployed machine learning models in your
organization?
a) Considering it
b) Will be rolled out soon
c) In Production
d) Not yet

Considerations for MRM for Machine
Learning models
Part 2

The Basics

Model Risk Defined

The Machine Learning and AI Workflow
Data Scraping/
Ingestion
Data
Exploration
Data Cleansing
and Processing
Feature
Engineering
Model
Evaluation
& Tuning
Model
Selection
Model
Deployment/
Inference
Supervised
Unsupervised
Modeling
Data Engineer, Dev Ops Engineer
• Auto ML
• Model Validation
• Interpretability
Robotic Process Automation (RPA) (Microservices, Pipelines )
• SW: Web/ Rest API
• HW: GPU, Cloud
• Monitoring
• Regression
• KNN
• Decision Trees
• Naive Bayes
• Neural Networks
• Ensembles
• Clustering
• PCA
• Autoencoder
• RMS
• MAPS
• MAE
• Confusion Matrix
• Precision/Recall
• ROC
• Hyper-parameter
tuning
• Parameter Grids
Risk Management/ Compliance(All stages)
Software / Web Engineer Data Scientist/Quants
Analysts&
DecisionMakers

Elements of Model Risk Management

Model Governance Structure

• Components that needs to be tracked
What constitutes an ML model?
• Interdependencies
• Lineage/Provenance
of individual
components
• Model params
• Hyper parameters
• Pipeline specifications
• Model specific
• Tests
• Data versions
Data Model
EnvironmentProcess
• Programming environment
• Execution environment
• Hardware specs
• Cloud
• GPU

Elements of a Machine Learning System
Source: Sculley et al., 2015 "Hidden Technical Debt in Machine Learning Systems"

www.prmia.org© PRMIA 2020 19
AI Governance Is Gaining Focus
https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0449

Theory to Practice: How to cross the chasm ?
• Theory
• Regulations
• Local Laws
• Practical ML systems
• Company Expertise
• Company culture and Best
practices

1. ML Life cycle management
2. Tracking
3. Metadata management
4. Scaling
5. Reproducibility
6. Interpretability
7. Testing
8. Measurement
Themes We Will Discuss Today

Polling Question 2
• Which is the most challenging aspect in your organization ?
a) ML Life cycle management
b) Tracking & Metadata management
c) Scaling
d) Reproducibility & Interpretability
e) Testing & Measurement

Up Next

24
Model Lifecycle Management

Source: T. van derWeide, O. Smirnov, M. Zielinski, D. Papadopoulos, and T. van Kasteren. Versioned machine learning pipelines for batch experimentation. In ML Systems, Workshop NIPS 2016, 2016.
Provenance and Lineage of Pipelines

Versioning

Schemas proposed
Sebastian Schelter, Joos-Hendrik Boese, Johannes Kirschnick, Thoralf Klein, and Stephan Seufert. Automatically Tracking Metadata and Provenance of Machine Learning Experiments. NIPS Workshop on
Machine Learning Systems, 2017.

Schemas proposed
G. C. Publio, D. Esteves, and H. Zafar, “ML-Schema : Exposing the Semantics of Machine Learning with Schemas and Ontologies,” in Reproducibility in ML Workshop, ICML’18, 2018.

MLFlow

DVC
Source: https://dvc.org/

31
Sample Project Structure
REF: Harvard Computefest 2020 demo example

GoCD
Source: https://www.gocd.org/

I. Altintas, O. Barney, and E. Jaeger-Frank. Provenance collection support in the Kepler scientific workflow system. In Provenance and annotation of data, pages 118–132.
Current Approaches

Miao, Hui & Chavan, Amit & Deshpande, Amol. (2016). ProvDB: A System for Lifecycle Management of Collaborative Analysis Workflows.
Current Approaches

Related Work
Xueping Liang, Sachin Shetty, Deepak Tosh, Charles Kamhoua, Kevin Kwiat, and Laurent Njilla. 2017. ProvChain: A Blockchain-based Data Provenance Architecture in Cloud Environment with Enhanced
Privacy and Availability. In Proceedings of the 17th IEEE/ACM International Symposium on Cluster, Cloud and Grid Computing (CCGrid '17). IEEE Press, Piscataway, NJ, USA, 468-477. DOI:
https://doi.org/10.1109/CCGRID.2017.8
Focus on Cloud data
provenance using Blockchain

Related Work
Ramachandran, Aravind & Kantarcioglu, Dr. (2017). Using Blockchain and smart contracts for secure data provenance management.
DataProv: Built on top of
Ethereum, the platform
utilizes smart contracts and
open provenance model
(OPM) to record immutable
data trails.

Related Work
Sarpatwar, Kanthi & Vaculín, Roman & Min, Hong & Su, Gong & Heath, Terry & Ganapavarapu, Giridhar & Dillenberger, Donna. (2019). Towards Enabling Trusted Artificial Intelligence via Blockchain.
10.1007/978-3-030-17277-0_8.
Trusted AI and provenance of
AI models

Model Inference Standards

Meta Data Management

Meta Data Management
1. Add people to Amundsen’s data graph, by integrating with
integration with HR systems like Workday. Show commonly
used and bookmarked data assets.
2. Add dashboards and reports (e.g. Tableau, Looker, Apache
Superset) to Amundsen.
3. Add support for lineage across disparate data assets like
dashboards and tables.
4. Add events/schemas (e.g. schema registry) to Amundsen.
5. Add streams (e.g. Apache Kafka, AWS Kinesis) to Amundsen.
https://eng.lyft.com/amundsen-lyfts-data-discovery-metadata-engine-62d27254fbb9

43
• Machine learning applications fail is due to the lack of rich, diverse and
clean datasets needed to build models.
• Historical datasets may be hard to acquire or may be skewed towards the
majority class.
• All plausible scenarios of the future haven’t happened yet!
• Synthetic data used to enrich and augment existing datasets to provide
comprehensive samples while training machine learning problems.
Role of Data Augmentation

GPUs for Scaling
REF : NVIDIA DLI Multi-GPU course slide deck

“TSNE Optimizations
There are four optimizations used to improve the performance of TSNE on GPUs:
1. calculating higher dimensional probabilities with less GPU memory,
2. approximating higher dimensional probabilities,
3. reducing arithmetic operations, and
4. broadcasting along rows.”
Ref: https://medium.com/rapids-ai/tsne-with-gpus-hours-to-seconds-9d9c17c941db
Using GPUs requires GPU compatible code changes

Polling Question 3
• What kinds of ML tools do you use in your organization?
a) None
b) On-prem - Enterprise
c) Cloud - Enterprise
d) On-prem – Open Source
e) Cloud – Open Source

The Reproducibility Challenge
https://www.nature.com/news/1-500-scientists-lift-the-lid-on-reproducibility-1.19970

• Repeatability (Same team, same experimental setup)
— The measurement can be obtained with stated precision by the same team using the same
measurement procedure, the same measuring system, under the same operating conditions, in
the same location on multiple trials. For computational experiments, this means that a
researcher can reliably repeat her own computation.
• Replicability (Different team, same experimental setup)
— The measurement can be obtained with stated precision by a different team using the
same measurement procedure, the same measuring system, under the same operating
conditions, in the same or a different location on multiple trials. For computational
experiments, this means that an independent group can obtain the same result using the
author’s own artifacts.
• Reproducibility (Different team, different experimental setup)
— The measurement can be obtained with stated precision by a different team, a different
measuring system, in a different location on multiple trials. For computational
experiments, this means that an independent group can obtain the same result using
artifacts which they develop completely independently.
Repeatable or Reproducible or Replicable
https://www.acm.org/publications/policies/artifact-review-badging

“Interpretability is the degree to which a human can
consistently predict the model's result”1
What is the objective?2
• Simply be to get more useful information from the mode
• Uncover causal structure in observational data
• Transparency? Convergence?
• Model complexity?
• Culture?
The Interpretability Challenge
1. https://christophm.github.io/interpretable-ml-book/interpretability.html
2. https://arxiv.org/abs/1606.03490

• Partial dependence plots (PDP)
• Shapley Values
• Lime (Local Interpretable Model-Agnostic Explanations)
• SHAP (SHapley Additive exPlanations)
Reference: https://christophm.github.io/interpretable-ml-book/
Shapley Values

• Partial dependence plots (PDP) show the dependence between the target
response and a set of ‘target’ features, marginalizing over the values of all
other features (the ‘complement’ features).
• Intuitively, we can interpret the partial dependence as the expected target
response as a function of the ‘target’ features.
https://scikit-learn.org/stable/modules/partial_dependence.html
The Interpretability Challenge

Which model to choose?
Client Objective:
• Build the best forecasting model that has a
MAPE of 5% or less
Result:
· Regression – 7% MAPE
· Neural Networks – 4% MAPE
· Random Forest – 5% MAPE
Client choice:
· Regression despite being the worst of the
top-3 models
· “I won’t deploy anything that I don’t
understand”
Source: http://engineering.electrical-equipment.org/electrical-distribution/electric-load-forecasting-advantages-challenges.html

Testing for Machine Learning Models
Figureref: http://www.actuaries.org/CTTEES_SOLV/Documents/StressTestingPaper.pdf

59
Comprehensive Testing Is Important

Can Machine Learning algorithms be gamed?
https://www.youtube.com/watch?time_continue=36&v=MIbFvK2S9g8
https://arxiv.org/abs/1904.08653
84

Model Risk Assessment Framework

Quantifying Model Risk Is Important

RISKGRADING
RiskScores
Impact
5 5 10 15 20 25
4 4 8 12 16 20
3 3 6 9 12 15
2 2 4 6 8 10
1 1 2 3 4 5
1 2 3 4 5
Likelihood of occurrence
Red High Risk
Yellow Moderate Risk
Green LowRisk
High Impact- High likelihood of occurrence: Needs adequate model risk
controlmeasures to mitigate risk
High Impact – Lowlikelihood of occurrence:Address through model risk
control measures
and contingency plans
Low Impact – High likelihood of occurrence : Lower priority model risk
control measures
LowImpact – Lowlikelihood of occurrence:Least prioritymodel risk control
measures

Summary
1. ML Life cycle management
2. Tracking
3. Metadata management
4. Scaling
5. Reproducibility
6. Interpretability
7. Testing
8. Measurement

Up Next Case study:
Using Synthetic Data for Model Validation

Polling Question 4
• Have you considered using Synthetic/Simulated data for testing
and validating models?
a) No
b) Considering it
c) Yes
d) Tried it and decided not to use it

Synthetic Data
• Synthetic data is "any production data applicable to a given situation that
are not obtained by direct measurement.”1
• In finance, Synthetic data has been used in stress and scenario analysis for
many years now.
• Example: Montecarlo simulations have been used to generate future
scenarios.
• In Machine Learning, Synthetic Data plays an important role to prevent
overfitting, handle imbalance class problems, and to accommodate
plausible scenarios.
1 https://en.wikipedia.org/wiki/Synthetic_data

Challenges with Real Datasets
All scenarios haven’t played out
• Stress scenarios
• What-if scenarios
Figureref:http://www.actuaries.org/CTTEES_SOLV/Documents/StressTestingPaper.pdf

Access
• Hard to find
• Rare class problems
• Privacy concerns making it
difficult to share
Picture source: www.pixabay.com

Imbalanced
• Need more samples of rare class
• Need proxies for data points that
were not observed or recorded
Picture source: www.pixabay.com

Synthetic Data in Finance
Ref: Machine Learning for Asset Managers, Marcos M. López de Prado,,CAMBRIDGE UNIVERSITY PRESS 2020

MRM Use Cases
• Data Anonymization
— Anonymize training and test data sets for internal and external model
validation
• Data Augmentation
— Augment sparse datasets with realistic datasets
• Handling Imbalanced data classes
— Handle Algorithmic bias and to test efficacy of model for rare-class
problems
• Stress and Scenario testing
— Simulate test scenarios for extreme but plausible scenarios to test
model behavior

VIX Characteristics
REF: https://www.investopedia.com/terms/v/vix.asp

Demo: Synthetic VIX Generation

Up Next Demo
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please contact us at info@qusandbox.com.

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QuantUniversity’s Model Risk related papers
Email me at sri@quantuniversity.com for a copy

Q&A Sri Krishnamurthy, CFA, CAP
Founder and CEO
Information, data and drawings embodied in this presentation are strictly a property of QuantUniversity LLC. and shall not
be distributed or used in any other publication without the prior written consent of QuantUniversity LLC.

Model Risk Management for Machine Learning

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