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Correlation, co-dependency and risk aggregation [17]

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Bullet points include: Fundamental risk models. Ascribe externally identified fundamental factors to individual instruments, e.g. leverage, book to price, ... (maybe sourced from company report and accounts). Often include industry classification. Econometric risk models. Factors are instrument-specific sensitivities to pre-chosen exogenous variables, e.g. oil price, long bond yield, currency, ... Factors usually derived from regression analyses. Statistical risk models. Factors and exposures of individual instruments to these factors found statistically. Usually via Principal Components Analysis (PCA)

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