Designing Market Shock Scenarios

Azamat Abdymomunov, Zheng Duan, Anne Lundgaard Hansen and Ulas Misirli
Additional contact information
Azamat Abdymomunov: https://www.richmondfed.org/banking/qsr/abdymomunov
Zheng Duan: https://www.richmondfed.org/banking/qsr/daun
Anne Lundgaard Hansen: https://www.richmondfed.org/banking/qsr/hansen
Ulas Misirli: https://www.richmondfed.org/banking/qsr/misirli

No 24-17, Working Paper from Federal Reserve Bank of Richmond

Abstract: We propose an approach for generating financial market scenarios for stress testing financial firms' market risk exposures. This approach can be used by industry practitioners and regulators for their stress scenario design. Our approach attempts to maximize risk capture with a relatively small number of scenarios. A single scenario could miss potential vulnerabilities, while stress tests using a large number of scenarios could be operationally costly. The approach has two components. First, we model relationships among market risk factors to set scenario shock magnitudes consistently across markets. Second, we use these models to generate a large number of scenarios and select those most likely to have tail-loss impacts and substantial variation across scenarios.

Keywords: stress test; bank supervision; market risk (search for similar items in EconPapers)
Pages: 38
Date: 2024-12-19
New Economics Papers: this item is included in nep-rmg
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DOI: 10.21144/wp24-17

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