Measuring and managing market, credit and Op risk [51]

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Bullet points include: Single index or factor for each obligor, (log) return of k’th firm’s equity value might be taken to be: Where, f = (standardised) factor return, alpha k = exposure of that firm to the market-wide factor and epsilon k = idiosyncratic noise term for that firm epsilon k and f assumed to be zero-mean, unit variance random variables Standard benchmark case as used in Basel II parameterisation – one factor and pairwise latent variable correlation alpha k of around 0.2

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