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Risk aggregation and Extreme Events [34]

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Bullet points include: Vast reduction in number of parameters that need estimating (if large universe) If m instruments, but just q factors (much smaller than m) then estimate only (q2+q+2*m)/2 not (m2+m)/2 Identifying factor structure may also help us understand better what drives aggregate (market) behaviour So how might we identify factors? An entire risk model vendor industry involved in this activity

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