Idiosyncratic risk

Best CVA practices in Japan

At a recent roundtable in Tokyo, banks and regulators discussed progress on credit valuation adjustment (CVA). While, in many respects, the work towards implementing best practices in the country is on track, challenges remain in resourcing and…

Regulatory costs break risk neutrality

Regulations impose idiosyncratic capital and funding costs for holding derivatives. Idiosyncratic costs mean that no single measure makes derivatives martingales for all market participants. Chris Kenyon and Andrew Green demonstrate that regulatory…

Factors on demand

Linear factor models are commonly used by portfolio managers to capture sources of risk, traditionally split between systematic and idiosyncratic types. By using the conditional link between flexible bottom-up estimation, and top-down attribution, factor…

Factors on demand

Attilio Meucci introduces a multi-asset-class return decomposition framework that extends beyond the standard systematic-plus-idiosyncratic approach. This framework, which rests on the conditional link between flexible bottom-up estimation factor models…

Overcoming the hurdle

How should capital be allocated to different business lines in a financial institution? Thomas Wilson explores this question from an investor’s perspective by constructing a statistical model that measures the risk of individual business types. The…

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