Creating and validating risk models [21]

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Bullet points include: However factor structures can be quite esoteric, depending on nature of portfolio ‘Intuitive’ for the manager, ‘Esoteric’ for an external risk manager E.g. credit portfolio might be subdivided into PFI/PPP, Airports, Enterprise, Gas/electricity utility, Local government, Sovereign/quasi-sovereign, Toll roads/bridges/mass transit, Water utility Choosing correlations then requires a complex process that includes setting weights on factors, weights on idiosyncratic shocks and correlations of factors themselves And we may have multiple data sources, multiple time horizons

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