by Scott, Susan V., Zachariadis, Markos
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Suggested foundations for credit and counterparty risk and trading research and honest backtests. Specialist prerequisites vary by paper.
Separate default probability, loss severity and exposure.
Read conditional default and exposure quantities.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Study dependence between defaults.
Connect exposure and counterparty losses to valuation adjustments.
Reconcile signals, executions, positions and P&L.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.