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.


1 Answer 1


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.


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