Business Sector – Open Risk Manual

Definition

A business sector is the subset of a given economy that is made up of individuals and/or companies (in different legal forms) that are active with the same or related economic activities (same type of production or services) and pursuing roughly similar business models.

Classification Schemes

• Standard Industrial Classification (SIC)
• North American Industry Classification System (NAICS)
• Nomenclature statistique des activites economiques (NACE Classification)

Relevance for Risk Management

Within a given Business Sector, entities might be subject to similar types of Business Model Risk.

Relevance for Portfolio Management

Management of diverse financial assets portfolios (bonds, loans, stocks) relies on identifying common perfomance characteristics that may drive significant segments of the portfolio (factors). It is very common to assume that business sectors are informative in this respect, although there is far from any consensus as to that intuitive dependency may be further quantified.

Depending on the precise application requirements there is a broad range for possible Factor Models that provide quantitative tools to express the degree of dependency between entities active in different business sectors

Issues and Challenges

• Business sectors can be difficult to define precisely as modern economic activity tends to be a continuum with many overlaps
• Sometimes the collection of households in an economy is designated as a distinct “business” sector

References