Chapter 7 - Implementing Risk Models

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This chapter demonstrates systematically how to build and implement risk models in an evolutionary iterative way within a well-organized framework. When implementing risk models, it is helpful to follow and implement a number of logical steps: compose the risk model structure: one should decide on how exposures are to be aggregated from individual holdings through a portfolio hierarchy structure into an ultimate global exposure; map building blocks to risk models: one should create the risk models themselves and then map the risk models to individual instrument building blocks; create and calibrate risk model Inputs: one should either identify some suitable source or build models to create his/her own inputs where they need to be transformed before they can be used in the valuation models; create risk modeling process: one should create an overall process that runs the risk models, feed them with data, and write any results back into the database so that later they can be used in online displays, reports, and data feeds; refine the risk model implementation: even in simple cases one should start with only a very small set of risk models, ideally, just one, then go on to refine his/her implementation in later iterations. One can thus add additional models and input data step by step in future iterations once he/she has the basic process running to a required standard.