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I am trying to perform stress testing for VaR and have taken into consideration two methods:- 1. Sensitivity analysis 2. Historical scenario analysis.

According to the Derivatives Policy group we need to take into consideration 5 factors which are:- o Parallel yield curve in ±100 basis points. o Yield curve shifts of ±25 basis points. o Stock index changes of ±10%. o Currency changes of ±6%. o Volatility changes of ±20%.

  1. I am trying to perform the stress testing through sensitivity analysis in excel for which I am not able to figure out how to mould the prices for equities,bonds and derivatives by taking into account above factors through the excel function data table. For instance, if I take into account the 3rd factor mentioned above as STOCK INDEX CHANGES OF +- 10% and one of my stock in my portfolio is listed in Dow Jones, so how can I adjust the prices for a particular time period (say 6 months).?

2.Secondly if I take historical scenario analysis in which I am taking the scenario for instance 1997 Asian crisis, how do I adjust the prices in this scenario also. In this case, for instance, my portfolio contains all the asset class which are issued in the last 10 years and therefore I dont have any data (prices etc.) for them related to the 1997 asian crisis. SO how do I adjust the prices in this case also?.

P.S :-I am using variance covariance method for calculating VaR. Eagerly waiting for valuable suggestions on this.

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  • $\begingroup$ Can you please clarify what exactly you are trying to estimate, VaR or P&L? VaR is a quantile metric, meaning that you need to create a distribution of portfolio p&l to estimate it at a specific confidence interval. Based on your description above, you only create a single scenario. This is stress testing, not stressed VaR. An example of the former is exactly what Dark mentioned above i.e. estimate the value of your portfolio under the new conditions (equity prices up/down x%) and find Delta PV. An example of the latter would be to change your co-variance matrix (correlations or volatilities) $\endgroup$ – user18489 Nov 23 '16 at 22:20
  • $\begingroup$ I am interested in what people come up with here. Couldn't you run a regression using the 5 factors as independent variables and your portfolio as a dependent variable. You can use the Betas as your sensitivities which will help you derive your desired sensitivities. $\endgroup$ – Rime Dec 24 '16 at 7:39
  • $\begingroup$ You should improve the question. What does it have to do with VaR? Stress testing complements VaR it is not part of it. What does your portfolio look like? And Excel-questions are not really on-topic. You should clearly state your portfolio and the set-up. Possibly references to the literature or regulation. Then we can try to help. $\endgroup$ – Ric Aug 17 '18 at 8:00
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  1. To replicate a STOCK INDEX CHANGES OF +- 10%, you just have to move the price of each stock by +- 10% (in case of the Dow Jones Index anyway because this index is a simple average of the prices of its components)

  2. You can use the 1997 scenario and apply it to your current portfolio by proxying your instruments to the instruments from 1997.

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