Good evening

This is where I am currently at with regards to calculating the sub interval details.

I have split the calculation into 2 steps, firstly I am taking the return for date x minus the average of date x to date y (for the RHP 1 year using 21 days) so for example, if my first return date was 20/09/2016, I would average the returns for 20/09/16-18/10/16 and power the result to 2 (ie (rti-M1)^2).

The second aspect is the wtiσs, which I have calculated as the Sum of the above results for 20/09/16-18/10/16 divided by the sub interval of 21 then square rooting that result.

Finally, I take the 99th percentile of the results.

However, using the ESMA guidelines and recently released flow diagram, I am unable to come up with the same results.

There appears to have been some discussion on whether or not you should use the latest years worth of data for the 1 year or if you should be using the full data set. Personally I believe it should be the full data set otherwise if the latest years data had lower volatility you wouldn't see the full effect of the stress over a bad years data set.

However, if this was the case, then why is the 3 and 5 year RHP stressed volatility different when they both use the same sub-interval and in theory the same full data-set.

Can anyone help me understand where I am going wrong and/or point me in the right direction please as I have managed to work everything else out and whilst I can get to within 4-5 decimal places of the ESMA results, the next step pushes the final figure for the stress scenario even further out (it works if I manually type in the figures for Wσs√N from ESMA) so I know that the last bit is not incorrect.

Apologies for the long question.


I think this question is dealt with partially here PRIIPs Stress Scenario for Category 2. I don't think you are going wrong and I believe you should use the full dataset to calculate the stressed volatilities.

The ESMA Flow Diagram ( https://esas-joint-committee.europa.eu/Publications/Technical%20Standards/JC%202017%2049%20(PRIIPs_flow_diagram_risk_reward).pdf) you refer to appears to have a number of errors in it. The stress scenarios for the 3 & 5 year period on page 24 appear to be incorrect because they should be identical. Annex 4 pt. 10 (https://ec.europa.eu/transparency/regdoc/rep/3/2017/EN/C-2017-1473-F1-EN-ANNEX-1-PART-1.PDF) is very clear that there is only a distinction between the stressed volatility for a 1 year horizon and other horizons. Hence, the 3 & 5 year stressed volatilities should be identical.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.