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Let me ask you about the following rationale regarding stress scenario (IV Annex 10 (c)):

" Identify for each sub interval of length w the historical lognormal returns rt, where t=t0, t1, t2, …, tN. "

I find myself wondering what the t0,...,tN are: in fact, given that RTS only mentions for historical data of up to 5 years, I interprete the above as saying that t0,...,tN should be the 5 years data used in the rest performance scenarios as well. Otherwise the RTS should be more specific of how and where exactly these "new data" come from.

Would you agree to that interpretation or are you of the opinion that for stress purposes one needs to get more historical data?

Thank you very much in advance for your answer!

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I interpreted it as the rolling standard deviation in 21 or 63 day Windows for the whole five years (less 21 or 63 days respectively) depending on whether you are doing one year or longer stress scenarios. I believe some think that the one year stress scenario means you only go back one year with the 21 day rolling window but this would surely be inconsistent with the other scenarios where regardless of the RHP you still use the maximum amount of historic returns.

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  • $\begingroup$ Thank you very much Rick! Really appreciate your answer! $\endgroup$ – Mary91 Oct 14 '17 at 13:26
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The Rick n Backer approach to the rolling window for stress scenario is the only logical and right approach you can choose. These rolling windows should be calculated for all the 5Y(if avaiable) data history. If we would only use data based on RHP we would get in quite big troubles with products with short RHP e.g when the produdct has shorter RHP than 21 days we wouldn't be able to calculate the risk scenario but all the scenarious are required to be shown in KID. Or if RHP would be more than 21 days but still somethig short we could get that stressed volatitily would be lower than the historic volatility which could result in that the stress scenario would be more optimistic than the unfavourable scenario which would be contradicting the idea behind the stress scenario.

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