Stress test design

Eduardo Canabarro
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Eduardo Canabarro: Former Managing Director, Global Head of Model Risk, Barclays

Journal of Risk Management in Financial Institutions, 2013, vol. 7, issue 1, 52-61

Abstract: This paper offers thoughts and ideas on the implementation of a company-specific stress test programme and focuses on the design of the stress test scenarios. In particular, it discusses the integration and coherence of the macroeconomic, market, credit, counterparty and operational risk scenarios. Certain specific features are recommended to enhance the stress test of market, counterparty and operational risks: the explicit consideration of the hedging and liquidity dynamics of trading portfolios, automated reverse stress testing for identification of market risk vulnerabilities, simulation of dynamic hedging costs of credit valuation adjustments (CVAs) and the averaging across different models to mitigate misspecification error and obtain more reliable estimates of stressed operational losses. All the above is framed within the context of the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) programme.

Keywords: stress test; CCAR; market risk; counterparty risk; operational risk; Dodd–Frank Act stress test (DFAST) (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2013:v:7:i:1:p:52-61

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