Idiosyncratic Risk

From Open Risk Manual


Idiosyncratic Risk is a somewhat loose term used in the contexts of assessing / managing a portfolio or collection of risks. It denotes primarily a risk (factor) that is specific to a debtor or a particular contract and uncorrelated with other risks. It is therefore a risk that can in principle be diversified.

Credit Information

An obvious element of this set is the payment status (past-due). While not sufficient to assess idiosyncratic risk, this information is required for a sound formation of expectations. In a rating based system this information is provided by a rating state that belongs to a non-performing range.

Current characteristics of the debtor (denoted X^k_i are part of the idiosyncratic information (summarized in the rating state). The formation of expectations even when purely on the basis of a historically derived rating is forward-looking, in the sense that it projects possible loss for an asset where there is no realized evidence to suggest so.


Rating systems are used in practice with management Overrides, which adjust the credit rating for stale or missing information regarding the state of an obligor. A non-trivial example concerns the state of the direct network of relations of the obligor (employer / suppliers etc).

With the inclusion of all "override" information (as reflected in the adjusted rating) the idiosyncratic information set I^i_k is complete - there is no other available piece of forward-looking information to include: Characteristics that have proven to have risk ranking ability on the basis of the historical record are forming the basis and any additional specific factors provide the flexibility for an adjustment. Yet quantitatively the weight of different scenarios is likely to depend on the outlook of dynamic factors that materialize at portfolio, sectoral, regional level. We collectively denote this as "macro" information set.