I have been looking at the onboarding of some derivative products, and the subject of our internal stress framework. I suspect like similar businesses, we have a set of stress scenarios, mostly based on historical events but given ad hoc tweaks, augmentations etc. at the discretion of the risk group. These are circulated and the outcome of the stress calculations are used for internal reporting, limits etc. in conjunction with other standard methods, VaR etc.
My question is, without trying to be too delicate, given the scenarios are circulated and calculated on a fixed schedule (they are not calculated daily) how might one stop the front office from optimizing their portfolio to the schedule and/or choice of scenarios? It is of distinct value to for the desks to get low scores on these tests.
Given the stress scenarios are large, deterministic moves, on fixed dates, it is relatively straightforward to design option portfolios that pay off on those particular dates for those particular moves. e.g. short dated ratio call/put spreads where the strikes and maturities are adjusted to give maximum benefit for the particular scenarios.
The most obvious first step would be to randomize the date of the stress, if one has a good enough handle on the term structures involved.
Given the philosophy of stress, it seems better not randomize the magnitudes, but one could randomize the selection from a given set of scenarios?
Is anyone aware of anything published anything on the matter? Or had thoughts on the subject?