Stressing correlations and volatilities — A consistent modeling approach

Christoph Becker and Wolfgang M. Schmidt

Journal of Empirical Finance, 2013, vol. 21, issue C, 174-194

Abstract: We propose a new approach to the definition of stress scenarios for volatilities and correlations. Correlations and volatilities depend on a common market factor, which is the key to stressing them in a consistent and intuitive way. Our approach is based on a new asset price model where correlations and volatilities depend on the current state of the market, which captures market-wide movements in equity-prices. For sample portfolios we compare correlations and volatilities in a normal market and under stress and explore consequences for value-at-risk.

Keywords: Correlation; Volatility; Basel III; GARCH models (search for similar items in EconPapers)
JEL-codes: C13 C32 C58 G11 G12 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:21:y:2013:i:c:p:174-194

DOI: 10.1016/j.jempfin.2012.12.009

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