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Stress Testing and Back Testing [24]

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Bullet points include: Identify sector risk model factors using (1) principal components analysis (standard deviation), (2) independent components analysis (kurtosis), or (3) blend (99.5% quantile using CF4). Size of ‘1 in 200’ events (if expressing just one of top 6 factors), for given exposure size on average given by numbers in bold. PCA (and hence most traditional risk systems) potentially significantly underestimates risk. PCA, only StdDev (c = 0), Blended (1 in 200 quantile level, CF4), ICA, Only Kurtosis, , Component, StdDev, Kurt, Criterion, StdDev, Kurt, Criterion, StdDev, Kurt, Av (top 6), Av (all 23)

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