Assume we have a system that is built on the CDS spread values. If we want to shock the system, how can we define the shock? For instance, we can define it as the increase in the spread. Of course a threshold should be decided for this. What are other ways to define the shock?

  • $\begingroup$ Could you be please be more specific? What is a "system" of CDS spreads? What do you need the shock for? What is a threshold? ...what is your ultimate goal? Thanks a lot. $\endgroup$ Commented Mar 9, 2022 at 12:30
  • $\begingroup$ I'm not sure what "system" means here, please clarify further. If you have some CDS spreads and want to make up some market stress scenarios, then single name spreads can widen or tighten by some basis points (e.g. widen 10bps, 20->30, 100->110), or some % (e.g. tighten by .9. 10->9, 100->90). Be sure to stress the correlations, e.g. all the credits that you're long widen at once, while index hedge tightens. $\endgroup$ Commented Mar 9, 2022 at 18:50
  • $\begingroup$ Also, in addition to spreads changng, you may want to consider the P&L impact of jumps to credit events, with very low and very high recoveries - even for names that are tight now. $\endgroup$ Commented Mar 9, 2022 at 20:13


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