Creating and validating risk models [13]

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Bullet points include: Advantages Closer to mark-to-market view of risk Can cover interest rate, equity index, credit and aggregate spread risk Disadvantages Generally poor on specific risks like shocks to specific names Omit or treat inconsistently event risk like downgrades and defaults Cannot credibly measure risk over longer horizons Common practice of multiplying risk measures by square root of time is unreliable Note: in a market implied world may not be as unreliable as it first appears

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