How to find plausible, severe, and useful stress scenarios

Thomas Breuer, Martin Jandacka, Klaus Rheinberger () and Martin Summer ()
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Thomas Breuer: Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.
Martin Jandacka: Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.

Working Papers from Oesterreichische Nationalbank (Austrian Central Bank)

Abstract: We give a precise operational definition to three requirements the Basel Committee on Banking Supervision specifies for stress tests: Plausibility and severity of stress scenarios as well as suggestiveness of risk reducing actions. The basic idea of our approach is to define a suitable region of plausibility in terms of the risk factor distribution and search systematically for the worst portfolio loss over this region. One key innovation compared to the existing literature is the solution of two open problems. We suggest a measure of plausibility that is not prone to the problem of dimensional dependence of maximum loss and we derive a way to consistently deal with situations where some but not all risk factors are stressed. Among the various approaches used for partial scenarios, plausibility is maximised by setting the non stressed risk factors to their conditional expected value given the value of the stressed risk factors.

Keywords: Stress testing; maximum loss; risk management; banking regulation. (search for similar items in EconPapers)
JEL-codes: G28 G32 G20 C15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-reg and nep-rmg
Date: 2009-02-05

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Related works:
Journal Article: How to Find Plausible, Severe and Useful Stress Scenarios (2009)
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