Cutting Edge introduction: systematic systematic factor models

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Financial models are often accused of being artificial and out of touch with real, underlying economics. It’s time for quants to take seriously the workings of the engine, critics say – rather than polishing the mathematical chassis.  Credit risk is one area where this was famously the case. Default times were said to be driven by systematic and idiosyncratic factors, with a co-dependence structure provided by a copula function. This did not go well for the industry in 2