by Charl Pretorius, Leandra van der Merwe, Neill Smit, Robert Maxwell, Willem D. Schutte
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Suggested foundations for credit and counterparty risk and financial time series. Specialist prerequisites vary by paper.
Separate default probability, loss severity and exposure.
Read conditional default and exposure quantities.
Check whether a relationship can be estimated consistently over time.
Read the fitted relationship and its residuals.
Study dependence between defaults.
Connect exposure and counterparty losses to valuation adjustments.
Study long-run relationships without confusing them with correlation.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.