5 votes

Stress Testing approaches at Pension Funds/Asset Management companies

Many long term investors use historical events and the market moves associated with such events to stress test their portfolios. For example, they use the dot-com bust, the latest "great recession", ...
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  • 5,335
4 votes

Pragmatic question about use of Stress Tests/metrics

Your process of calculating the impact of market stress scenarios sounds more manual / less automated than best industry practices. The disadvantages of having manual processes incclude: it's ...
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3 votes

Stress testing by Banks

U.S. centric answer. Banks/financial institutions are given standard stress scenarios by regulators for CCAR and DFAST (Dodd-Frank Act Stress Testing). It's a good bet that many institutions in ...
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3 votes
Accepted

CCAR Shocks Scenario

"1) Whether the shocks to Vol points are in % or bps. For example, for Australia bump to 1M vol is 16.2, so is this 16.2% of original Vol or it is a bump of 16.2 basis points to the original vol?" ...
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3 votes

Stress Testing Methods

I would suggest you to add spreads to the implied hazard rates, spreads that you regress on the macroeconomic factors. Then you stress by calculating the spreads corresponding to the stressed factors.
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  • 718
3 votes

Market risk stress testing?

One of the easiest ways is described in Duffie, Pan (1997) "Bootstrapped Simulation from Historical Data" p.55. $R$ is the set of all risk factors (a time series) $C_{norm}$ is the Covariance Matrix ...
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2 votes

Standard Formula for Solvency II

Your link refers to a paper that compares the Standard Formula (prescribed approach to SII calculations) and Internal Models (where companies apply to use their own approach for deriving capital ...
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2 votes

How to check that an interest rate curve is arbitrage free

To say a curve is arbitrage-free, you need to pick an arbitrage path; a series of trades which, when followed, yield a net profit without creating exposure. We neglect counterparty exposure here, ...
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  • 3,609
2 votes
Accepted

Should price impact be the same for positive/negative implied volatility shocks?

It may help you to notice that, for a bump in implied volatility $\delta \sigma$, the impact on the price of the derivative $V$ is given by: $$ \delta V = \underbrace{\frac{\partial V}{\partial \sigma}...
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  • 14k
2 votes
Accepted

EBA Stress Test Arbitrage

I would not be surprised that you can perform some regulatory arbitrage by mean of little financial engineering as you suggest, see for example: https://www.risk.net/our-take/7046041/in-stress-test-...
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  • 548
2 votes

Stressing liquidity (time to liquidate) of a long only equity fund using participation rate or bid ask

If you are concerned about how fast can you convert your equity holdings into cash, then you would care about the ADV (average daily volume) and cost would be a secondary issue. What you can do is ...
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  • 1,708
2 votes
Accepted

Required adjustments for stressed yield curves

My question now is what further adjustments do these stressed curves need? One subject that comes to mind is the "no arbitrage-ness" of the curve. Do I have to make sure that the curve does not ...
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  • 548
1 vote

Stress testing by Banks

Two applications of machine learing (related) techniques are in valuation using neural nets of complex products, e.g. "Deep xVA solver -- A neural network based counterparty credit risk ...
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  • 7,702
1 vote

Market impact in stress

I will attempt to elaborate on this from risk management perspective. scenario analysis approach: An example of this is stress testing that Fed mandates for investment banks. Fed gives stress ...
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  • 223
1 vote
Accepted

How to stress test a correlation matrix

As the correlation matrix will most probably become non-positive-semi-definite with such an ad hoc manipulation, you may try one of the following: Still run that algorithm and check that the ...
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  • 5,853
1 vote

Stress testing fixed income Yield curve with Nelson Siegel

Have a look at Basel document. The section 98.56 and on describe derivation of the interest rate shocks. 16 years may be too long depending on your portfolio, but I think you can shorten the period ...
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  • 1,708
1 vote

Applying Interest Rate Shock to Equities, FX, etc

First assume you have been given/you know the shocks scenarios. Ideally you would have these scenarios in term of shifts/movements- e.g., curve shifts by $a+bT$. So what I would do is to price the ...
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1 vote

From risk limits to pnl projection?

Seems like a complicated issue perhaps not well suited for general discussion (too specific to the situation). What I would do is (0) Understand in detail what the limits are currently (may be ...
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  • 9,617
1 vote

From risk limits to pnl projection?

I would check performance return from each sectors and test if it will improve with different risk limit while total risk still tolerable.
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  • 131
1 vote

Which market developments are we likely to see within the next years?

The number of scenario's I could come up with is infinite, these 3 seem interesting and give a backstory which can make discussions with trustees easier: If you're invested in Europe, I would ...
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  • 7,702
1 vote

Commercial providers of scenario analysis and modeling

All the big factor risk model providers do macro scenario analysis as part of their suite of products. From the point of view of portfolio management, these sorts of products are ideal for putting ...
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  • 264
1 vote

Do I need simulink to model the risks of an option portfolio

Well, I am not an expert in this field but I set up quite some simulation studies in Matlab and I never had to use Simulink before.
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  • 1,436
1 vote

How to check that an interest rate curve is arbitrage free

Conventional wisdom would have it that the system would be arbitrage free if and only if: All the implied spot and forward rates on each curve are non-negative (I.e implied discount factors are ...
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1 vote

Definition of risk factors for market risk scenario testing

There exist a lot of way to choose risk factors and the choice differs according to the kind of underlying assets. In your case, particularly, since the portfolio is composed by currencies, I would ...
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  • 2,446

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